During intense research on starting or growing a business, individuals may come across the concept of licensing and franchising. Franchising and licensing have some similarities, but they are quite different. Because of this, it’s vital to have a reliable legal team such as Rod Hatter & Associates to have the proper contracts and agreements to prevent any legal problems. With that in mind, we will explain the difference between these two, as well as the pros and cons.
What is Licensing?
Licensing is where a specific party is granted the rights to a particular registered trademark of a brand. When this happens, the business relationship is established between the licensor, the person who owns the trademark, and the licensee, the individual who is granted the right to use the trademark. To use a registered trademark, the licensee will have to pay the licensor a royalty fee.
An Example of Licensing
The best example of a licensing trademark is Calvin Klein. Calvin Klein works with numerous manufacturers under a licensing agreement. This arrangement indicates that the company has loaned or licensed its brand to various manufacturers who use them to sell their products. Therefore, the Calvin Klein products, such as the perfume, jeans, and underwear, are all branded under a licensing agreement.
Using a recognizable and well-known brand like Calvin Klein under an agreement can help a lesser-known brand to get their product to the market and gain trust by the consumer faster than they would if they had built their brand from the start.
What is Franchising?
A franchise is an agreement between the franchisor and franchisees. The franchisor is the owner of the business and sells the rights of their brand and intellectual property to the franchisee, which opens up a separate branch under that brand name to duplicate the business model. Because of the franchise agreement, the franchisee typically must pay fees to the franchisor to open the business using their brand, business support, and advice. The franchisor will loan the brand for a particular cost as well as providing consultation, training, and expertise to the franchisee.
Related: How to Start a Franchise in 15 Easy Steps
An Example of Franchising
One of the most famous franchises is McDonald’s that started very small and has over 36,000 restaurants around the world. Other renowned franchise businesses, includes:
- Pizza Hut
- Burger King
- Taco Bell
The concept of a franchise is that no matter which one you visit, it will all look and feel the same and offer the same products and services.
Licensing Pros and Cons
- Licensing is a secure investment because the licensee is purchasing the right to use a trademark that is already appreciated and recognized by a huge fan base.
- Licensing has a more flexible and straightforward agreement because it only covers one or a few protective marks.
- Licensing only gives us access to a particular protected trademark, and nothing more.
- It is difficult to determine whether to create a licensing agreement in the first place and whether the agreement is crossing the legal boundary of a franchise.
Franchising Pros and Cons
- The benefits of being a self-employed business owner without the risk of starting a business.
- It contains a proven business model with an established customer base.
- Less risky than starting a business from scratch.
- They require a smaller investment than starting a new business.
- It provides franchisors an opportunity to scale their business rapidly while reducing the amount of work that is required to do that.
- They are an excellent opportunity for the franchisee to work with the franchisor to learn new business skills and manage the business at the same time.
- The franchisee will not have full control of the business because the majority of the decision is created and approved by the franchisor.
- The initial franchise fee can be quite expensive, costing anywhere from $10,000-$50,000.
Related: Franchising Basics: The True Cost to Open a Franchise
Growing Your Business: The Beginning Stages
In the beginning stage of building a business, choosing a licensing option can get business owners off to a fast start. It allows the licensor to grant licensees the rights to their trademark and intellectual property. The benefit of this is that the licensor can generate additional revenue and further expand the recognition of the brand.
However, the problem is that it could lead to a particular limitation from a legal standpoint. This means that when granting a license to use a trademark or intellectual property, the licensor cannot be permitted to have control over how their licensees are using it. Plus, as the business keeps expanding, the lines between licensing and franchising begin to blur out, and it could be detrimental to cross the boundary towards the side of a franchise. This is why it’s essential to have an expert lawyer to properly draft out a license agreement to avoid a franchise liability.
Franchisees start off to a slow start, but once they get going, their business begins to build momentum. This is mainly because, when it comes to the franchise industry, the individual will have to prepare an Franchise Disclosure Document or FDD, which can be very lengthy. Once all the agreements and FDD are appropriately drafted, the stringent regulation can be quite beneficial for both the franchisor and the franchisee.
In the early stages, between 6 to 18 months of expansion, a franchised business may start off slowly because of all the rules and regulations from the agreements and Franchise Disclosure Document. But once everything is set up, franchising is a better option than licensing. This is because licensing can lead to some limitations and legal problems as the business expands.
Related: What is the Difference Between a Franchisor and a Franchisee
Growing Your Business: Stabilizing and Expanding
Once the business stabilizes and starts expanding, that is where licensing will experience some issues. For example, just because one refers to a business entity as a licensing arrangement doesn’t mean it is not a franchise. Because of the nature of the relationship, it makes licensing individuals wonder whether there is a trademark license in place, whether they have control, and whether any fees are paid to them. Multiple questions will begin to rise, and legal problems may come up. All of this stems from regulatory bodies wishing to prevent the license business structure from entering the franchise domain.
Throughout the whole expansion process, the franchise regulation will still apply, but the idea of duplicating the business model and having a franchisee open multiple stores in different locations, building a team, and running it can help the business grow and expand even more. The only issue is that the franchisor might accidentally violate the franchise law and leave themselves in a pretty dark situation. Fortunately, with the help of an expert legal team, like Rod Hatter & Associates, a franchisor can prevent this from happening.
Better Choice: Franchising
Licensing is a role, but should never be substituted for a franchise. When it comes to building a business and expanding it, a franchise is still a better option than licensing.
Related: 10 Benefits of Owning a Restaurant Franchise
At first, it may seem like both licensing and franchising are the same concept, but they are actually quite different. Both licensing and franchising are excellent ways to grow a business, but franchising is still the more popular option. This is mainly because of the way it’s structured in that the franchisor and franchisee work very closely together to manage and expand the business to various locations. However, even though licensing seems like the common sense option at first, it can lead to legal issues as the company expands.
It’s essential to have legal experts such as Rod Hatter & Associates draft contracts and agreements which thoroughly indicate the details between the franchisor and franchisee. This support will help reduce any liability or problems over the long run. With the right attorney and determination, anyone can run a successful franchise.