Franchising is different than licensing in a few ways, what is most suitable for your business will depend on many factors, scaling goals, and personal goals. Franchising and licensing are both ways for a company to expand its business by allowing others to use its trademark, products, and business model. However, they are different in several key ways.
Starting a franchisor / licensor business involves several steps:
- Develop a successful business model and establish a strong brand.
- Create a comprehensive franchise operations manual that outlines all aspects of running the business.
- Seek legal advice to ensure compliance with federal and state franchise laws and regulations.
- Once you have a pool of interested franchisees / licensees, provide training and ongoing support to help them succeed.
- Develop a licensing agreement that outlines the rights and responsibilities of both the franchisor and the franchisee.
- Create a marketing plan to attract potential licensees.
- It's important to have a strong understanding of the industry and the demands of the market before starting a franchisor licensing business. Additionally, it is important to have a solid track record of success with your own business and a strong support system in place for licensees.
- It is also important to have a solid understanding of the difference between franchising and licensing, and which one is more suitable for your business model.
- This is a really good franchisor / licensing financial model to help with initial planning / scale.
Difference Between Franchising and Licensing
Franchising and licensing are both forms of business expansion that allow a company (the franchisor or licensor) to expand its brand and business model to multiple locations or businesses (the franchisees or licensees) through a contractual agreement. However, there are some key differences between the two:
- Control: In a franchise agreement, the franchisor has a high level of control over the franchisee's operations, including the use of the brand, products, and services. In a licensing agreement, the licensor has less control over the licensee's operations, and the level of control is specified in the licensing agreement.
- Investment: In a franchise agreement, the franchisee typically makes a significant investment in the business, including an initial franchise fee and ongoing royalties. In a licensing agreement, the licensee typically pays a one-time or ongoing licensing fee for the use of the brand and intellectual property.
- Training and Support: In a franchise agreement, the franchisor typically provides training and ongoing support to the franchisee. In a licensing agreement, the level of training and support provided by the licensor is specified in the licensing agreement and may not be as comprehensive.
- Term: In a franchise agreement, the term of the agreement is usually longer and the franchisee is usually obligated to operate the business for the term of the agreement. In a licensing agreement, the term of the agreement is usually shorter and the licensee is not obligated to operate the business for the term of the agreement.
- Renewal: In a franchise agreement, the franchisee may have the right to renew the franchise agreement upon expiration. In a licensing agreement, the licensee may not have the right to renew the licensing agreement upon expiration.
Why Choose Franchising over Licensing?
- If a company wants to maintain a consistent brand image and customer experience across all locations.
- If a company wants to have more control over how its products or services are marketed and sold.
- If a company wants to generate a steady stream of revenue through franchise fees and royalties.
- If a company wants to expand more quickly and with more certainty of success, since franchisees are often more invested in the success of the business.
A company would choose licensing if they wanted the opposite of the above. The reason one may like licensing is it doesn't require as much investment or responsibility.
Why Choose Licensing over Franchising?
Licensing may be a better option than franchising in certain situations, such as:
- If a company's business model or products are not well-suited for replication across multiple locations.
- If a company wants to retain more control over its intellectual property and is not willing to provide the level of support and control required of a franchisor.
- If a company wants to generate a one-time revenue through licensing fees, rather than ongoing royalties through franchising.
- If the company wants to license its products or services to other companies in order to manufacture and distribute them under their own name, rather than setting up new retail or service outlets.
- If the company wants to enter a new market but does not have the resources or knowledge to set up a new business from scratch.
- If the company does not want to invest as much in the success of the business, licensing allows for less involvement and risk compared to franchising.
Franchising and licensing are both ways for a company to expand its business by allowing others to use its trademark, products, and business model. However, they are different in several key ways.
What Kinds of Businesses do Well with a Licensing Model?
Licensing can be a good business model for a variety of industries, but it is often used in industries where the product or service is well-established and has a strong reputation. Some examples of industries that may do well with a licensing model include:
- Fashion and apparel: A fashion designer may license their name and designs to a clothing manufacturer.
- Entertainment: A movie studio or musician may license the rights to their work to other companies for use in films, television shows, or commercials.
- Technology: A company may license its patents or software to other companies for use in their products.
- Sports: A sports league may license the rights to use its teams' logos and trademarks to manufacturers of sports merchandise.
- Food and Beverage: A restaurant chain or food product manufacturer may license its recipes, brand, and trademarks to other companies for use in producing similar products.
- Additionally, licensing can be a good model for companies that have a lot of intellectual property such as patents, trademarks, or copyrights that they want to monetize.
In general, licensing is a good fit for companies that want to generate revenue from their existing assets, but don't want to expand their business through opening new locations or operations.
What Kinds of Businesses to Well with a Franchising Model?
- Fast Food: Many fast food chains such as McDonald's, Subway, and KFC are successful franchise business model.
- Retail: Stores such as 7-Eleven, Subway, and Ace Hardware are successful franchise business models.
- Service industries: Businesses such as H&R Block and Jiffy Lube use a franchise model to expand their business.
- Personal services: Businesses such as hair salons, gyms, and spas use a franchise model to expand their business.
- Business services: Businesses such as printing, shipping, and cleaning services use a franchise model to expand their business.
Franchising typically involves a greater level of control and support from the franchisor. Franchisees are required to follow the franchisor's established business model and are typically given training and ongoing support. In return, the franchisor receives a larger percentage of the franchisee's profits and has more control over how the business is run.
Licensing, on the other hand, typically involves less control and support from the licensor. Licensees are typically given more freedom to operate the business as they see fit and are not required to follow the licensor's established business model. In return, the licensor receives a smaller percentage of the licensee's profits and has less control over how the business is run.
