Franchising is a much broader concept since it involves a greater degree of control by the franchisor. This has been a guide to Licensing vs Franchising. Here we discuss the top difference between Licensing and Franchising along with infographics and comparison table. You may also have a look at the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.
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Difference Between Licensing and Franchising Licensing refers to an arrangement between licensor and licensee where latter party would acquire the right to use products and goods where the ownership remains with the licensor whereas Franchising refers to an arrangement between franchiser and franchisee where the latter will enjoy the ownership of a business on behalf of the franchiser in lieu of a fee where the processes are closely controlled by franchisor therefore it is generally seen that licensing is for products and goods whereas the franchising model is used more in service providing industry.
What is Licensing? In fact, franchising crosses many industries including fitness, home health care, family entertainment centers such as trampoline parks, home improvement services, and tutoring services. For example, Frank is a successful restauranteur. However, Frank does not want to invest his own money in the restaurant and does not have the time to manage yet another location.
This relationship is a franchise. In exchange for these rights, Bob will pay Frank a fee. Therefore, when creating a license relationship, it is important to make sure that a franchise is not inadvertently created. Such activities, even inadvertent, may render the business opportunity a franchise and subject the licensor and even its owners to civil and potentially criminal charges for failure to comply with franchise laws. In franchising, as in all business management, knowledge is power.
Be informed. Call Understanding the differences between franchises and licenses is only the first step in figuring out which is the right business model for you. One of the pros of becoming a franchisee is all the benefits of being a self-employed business owner without the risks of starting a new business.
Purchasing a franchise is often much less risky than starting a business from scratch, and while there can be significant fees involved, they may amount to a smaller investment than if you were to build your own company from scratch. Franchising also has the benefit of a shared relationship. The franchisor gets to scale their business rapidly while minimizing some of the work, which is instead done by franchisees.
Additionally, the franchisee works with the franchisor to manage the business and learn business skills that they may not know already. In comparison to licensing, one of the big pros of franchising is the depth of the relationship between franchisee and franchisor.
The franchise agreement may be complicated, but it also provides a wide range of opportunities. One of the drawbacks for a franchisee is the loss of control. While this support can be beneficial while learning the ropes of the business, it can also feel like being micromanaged to experienced business owners.
However, this control is a pro for the franchisor, as they can still dictate how their brand is used. In comparison to a license, a franchise will seem much more expensive and complicated. In comparison, a licensing agreement only gives you access to use specific trademarks in certain ways. So, a license will be cheaper and less complicated, but it also gives you access to a lot less. Because of this cost discrepancy, business owners will sometimes opt for licensing agreements instead of franchising agreements; however, these are not interchangeable and often do not work for the same types of businesses.
If initial fees are prohibiting you from starting a franchise, you may want to check out these low-cost franchise options , or you can also seek out franchise financing to help you fund these expenses.
One of the pros for licensing is the freedom for the licensee. In general, a license agreement happens between two established businesses. The licensee is purchasing the right to use protected marks that are already recognizable and appreciated by a built-in fan base. This makes licensing a secure investment and a great way to boost your business. In comparison to franchises, another positive aspect of a license is the simplicity of the agreement.
Because the license agreement covers the use of only one or a few protected marks, the agreement will be fairly simple and straightforward. The major con of licensing over franchising is the limitations. A license only gives access to use certain protected marks, nothing more. While this makes the agreement limited, that might be all your business needs.
Be sure to check with a knowledgeable lawyer before signing either a licensing or franchising agreement. If this is true and you run a service-based company, then franchising may be the right move.
From the perspective of the franchisee or licensee, you need to think about where your business is within its journey. If you have a successful product-based business and are ready to grow, a license agreement with a recognizable brand could be an easy way to spur some quick growth.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet. What is franchising? Franchising examples. Burger King. Pizza Hut. Marriott International.
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