As an entrepreneur, building a successful brand is not easy. There are probably other people out there with the same idea as you. Therefore, entrepreneurs must be strategic. They need to consider there are bigger brands out there looking to expand their business by entering into specific agreements with other businesses.
Through franchising or licensing, small business owners can build their business using an already established brand. Depending on the type of agreement, small business owners may get support and training from the other party. Let’s look at both kinds of agreements and their differences in detail.
What is Franchising?
A franchise is an exclusive right given by a parent organization to an individual or enterprise to use its products, services, brand and business systems to open shop at an independent location.
The franchisee will have to pay a fixed amount as deposit and get the outlet ready for business as per the franchiser’s standards. The initial investment might seem high. If done right, the benefits can outweigh the up-front cost. Entrepreneurs can also consider franchise funding to finance their franchisee if cost is an issue.
What is Licensing?
Licensing is a business arrangement in which a company authorized another by issuing a license to temporarily use its manufacturing process, brand name, copyright, etc. under specified conditions. The licensor charges the licensee a fee or royalty for the use of the above-mentioned use of property rights.
One of the main differences between licensing and franchising a small business’ brand is brand control. Franchising lets the small business owner retain a fair amount of control over the franchise and reserves the right to impose their business model to ensure that the business succeeds.
The best example of this is Subway. There aren’t any major differences between subway locations from one to another. The franchisor has complete control over everything from the décor, equipment and protocol of each franchisee to maintain the same standard for products and services regardless of which location customers visit.
Licensing, however, offers the licensor no control over how the products and services are marketed. They licensee has complete freedom to choose how the products or services are manufactured and marketed.
Territory rights is another aspect that should be taken into consideration. When your small business is franchised, you are at liberty to define territorial boundaries to control competition. However, a small business’ brand can be licensed to any store or business without any geographical restrictions. This means that the franchise won’t be bound to a specific territory and the franchiser can focus on opening new stores wherever there is a need.
Training and Support
Be it franchising or licensing, providing training and support to personnel is critical. In franchising, the franchiser is obliged to provide extensive training on the operations of the business as a whole. This is done to ensure that there is a uniform standard of operations, products and customer service across all franchisees. A licensor provides training and support that is usually just limited to product knowledge.
A franchise agreement is typically not limited with a maximum term for the agreement. But some states may not enforce a franchise agreement without a limited term. This may apply to agreements without a specified duration or to agreements that are automatically renewed. In licensing, the duration of agreement usually last 16 – 20 years, especially if they relate to technology, trademark or copyright. The terms are more or less similar to that of patents.
In franchising, the choice of franchisee is up to the franchiser. They won’t be successful in the long run if they don’t get franchisees who are not successful in their own business first. New franchisees will require extra support from the franchiser than an experienced franchiser. They also generate lower revenues and pay less royalties. The eventual replacement of a franchisee is also controlled by the franchiser.
Licenses are usually self-serving and taken by already established businesses who have demonstrated that they can operate the license. The licensee can also pass the license on to an associate or even an unrelated company with little or no reference back to the licensor.
The franchiser should and is expected to pass on any benefits of any ongoing research programs to all its franchisees. This explained out in the agreement. This is critical to maintain uniform standard of operations and quality. Licensees, however, get very little benefit from any ongoing research from the licensor.
In franchising, the franchiser retains the overall goodwill and the franchisee gets the localized goodwill. Meanwhile, in a licensing agreement, the goodwill is entirely retained by the licensor.
Franchising comes with a standard fee structure for all franchisees. Negotiations are typically not done because any variation within an individual franchise will lead to confusion for the company. Licensees can negotiate the fee or royalty. They can use their already established positions in the market as bargaining tools to arrive at a favorable rate of compensation.
The choice between franchising or licensing depends on the small business owner’s needs. Every business has its own set of challenges. Consider the advantages and disadvantages of franchising as well as licensing, and match them with your business to know what’s right for you.