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When a business is looking to expand, franchising and licensing are often seen as the most attractive ways to do it without incurring too much risk or cost. Both choices mean that the business’ message can be spread further, whether that’s through its products, or by widening the scope of its brand reach. The two options are quite different in terms of the level of involvement of the licensor/franchisor and the independence of the licensee/franchisee. Here are the basics of the franchising v licensing debate.
Essentially, a franchising model is where a smaller business uses the reputation built up by another business to make its mark on a local market – and the larger business essentially expands via the new outlet. The smaller company effectively becomes another branch of the ‘parent’ style franchisor, using both its business model and its brand name in order to get established.
The control that a franchisor has over the franchisee is probably the major difference between franchising and licensing, as the operations and processes remain considerably within the control of the franchisor. However, at the same time there is support for the franchisee in the form of branding and marketing guidance and ensuring that the various branches of the main business don’t over compete, something that is not offered by a licensor.
Licensing is a very different model, as here the licensor company sells licenses for its IP, business programmes, branding or design. The licensor will generally not have any influence over business operations of the licensor, although the licence agreement may set out some control over how the intellectual property that is the subject of the licence can be used by the licensor business. These licenses are usually sold to much smaller companies than the licensor. As the licenses that are sold tend not to be exclusive licences they are sold often to numerous different businesses, rather than to just one, and no territorial rights are offered.
The main difference here is that the franchising agreement creates an ongoing relationship between the two parties, whereas the licensing agreement does not. The fee that is paid for the licence could involve regular payments or be a one off, as required, but essentially leaves the licensor free to run their business as they choose. With the support that franchising provides also comes control, even to the extent that the franchisor may tell the franchisee that they have to buy their business supplies from the franchisor (from which the franchisor can profit), but licensees are not subject to any interference in their business spend as there are no consequences for the licensor if the business fails.
The franchising v licensing argument depends very much on the individual circumstances of the businesses involved. The degree of control preferred is the essential element for most and will usually determine which option is selected.
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