What’s the Difference between a Franchising and Licensing Model?
At first glance, the concepts are similar. But, there are big differences, too, which boil down to control.
First, it’s important to know the definition of each:
Franchising is a proven way to grow a business and provide goods and services through the franchisees of the company, or franchisor. The franchisor and franchisee sign an agreement, which allows the franchisee to sell those goods or services using the franchisor’s brand name, trademarks, methods of operation and marketing plans. The franchisor provides support to help the franchisee function successfully and consistently with all the other franchise locations. In return for use of the brand name, proven systems and support, the franchisee pays the franchisor a royalty fee.
Licensing typically refers to when a company, the licensor, grants permission to another company or individual, the licensee, to use the licensor’s brand or intellectual property to manufacture and/or sell the licensor’s products. The licensee pays a fee or royalty to the licensors for the right to do this. An example of a licensor-licensee relationship for manufacturing is Procter & Gamble, which grants licenses to companies to produce popular household brands, such as Tide, Febreze, Mr. Clean, Vicks and Braun. Retailers are often licensees, too. A good example is mobile phone retailers, which must be authorized by cell phone manufacturers to sell their brand. For instance, AT&T, Sprint and T-Mobile are authorized sellers of Apple iPhone's and Samsung Galaxy phones.
The goal is the same for both business models. Franchising and licensing are similar in that they both involve a company issuing licenses to expand the reach of products and services. The labels of players involved are even similar – franchisor/licensor and franchisee/licensee. Both the franchisor and licensor retain ownership of intellectual property.
But there are many more significant differences.
Many differences exist between franchising and licensing. Some of the most notable include:
- Amount of control
- Franchise ‑ While the franchisee operates as an independent arm of the franchise company, the franchisor maintains considerable control over processes. Since a large part of franchising is based on uniformity and consistency across a system of individual locations, franchisors exert authority over how a location appears and, to an extent, operates.
- License – The licensor can control the use of its intellectual property, but it has no say in how the licensee runs their business. Therefore, the licensee can sell competing brands.
- Training and support
- Franchise – The franchisor must provide its franchisees with training on operations of the business. It’s standard for franchisors to provide support in the areas of grand opening, marketing and site selection.
- License – Licensors are not required to provide any training or support to licensees.
- Fee structure
- Franchise – In franchising, there’s typically the franchise fee that the business owner pays to the franchisor when he or she signs the franchise agreement. Franchisees also pay a royalty, a percentage of the monthly gross sales from each franchise location, to the franchisor. It’s not unusual for franchisors to collect ongoing fees, too, for things like marketing and advertising. These fees are non-negotiable.
- License – License agreements typically require an initial payment and royalties, but the terms and amount of money can be negotiated.
- Franchise – Franchises are regulated by the Federal Trade Commission. Franchisors are required to provide a financial disclosure document to entrepreneurs who express a serious interest in investing in a franchise. Many states also have registration and disclosure laws.
- License – Because the license is a contract between the licensor and licensee, but different from a franchise agreement, they are regulated by contract law.
Which is Best for Your Business?
Determine what your goals are. Licensing might be right for you if you’re comfortable with contracting another company to make or sell your products with little to no quality control from you as the licensor. However, franchisors typically appreciate the control they maintain despite the higher costs compared to licensing. Not only can you sustain consistency across the franchise system, but you can also make sure franchisees are not selling a competing brand along with your own. In general, you have more control over the brand. The ROI of going the franchising route can be rewarding, as well. If you have a unique and proven concept, entrepreneurs will invest and you can feel good about providing business ownership opportunities.
With 30 years of franchising experience and more than 800 franchise owners representing over 1,200 locations for five brands, Winmark Franchise Partners can help emerging franchisors decide whether franchising or licensing is the best way to grow their business. Contact us here or at (844) 452-4600.