Licensing and franchising are business arrangements that allow a seller to use certain aspects of a brand they do not own for a fee. While the two have some striking similarities, they also have clear distinctions.
If you want to venture into a franchise or a license agreement, you must understand the differences between the two.
What Is a Franchise?
A franchise is typicallymore well-known out of the two business arrangements. It is an arrangement between two parties; the franchisor and the franchisee. Under this arrangement, the franchisor allows the franchisee to use their trademarks, brand names, and business model after paying a fee. The franchisee then opens a branch that is a complete replica of the original business.
The franchisor maintains a certain amount of control over how the business is run. So if you are independent-minded, a franchise agreement may feel too limiting. Besides the initial fee that secures the franchisee’s right to use the franchisor’s products, business model, and intellectual property, the franchisee must also pay an ongoing fee in exchange for benefits such as advertising and training of employees.
An example of a famous business that uses the franchising model is McDonald which currently has over 36,000 franchise outlets spread across America and outside America. Other notable businesses that use the model include Dunkin’ Doughnuts, Pizza Hut, Burger King, Taco Bell, And Ace Hardware Corporation.
What Is a License?
Like a franchise, a licensing approach involves two parties; the licensor and the licensee. Under this arrangement, the licensor owns the trademarks but allows the licensee to use them after paying a fee.
Unlike the franchise arrangement, the licensor has little control over what the licensee can do in their business. The only level of control a licensor has over a licensee may be on how the licensee can use their trademarks, but nothing more.
Popular license model brands include Nike, Calvin Klein, and Disney. While these brands may be actively involved in producing products under their brands, they also sell the rights to their brand names to other entities allowing them to use them. However, the brand may demand that licensed products meet a specific standard to use their trademarks to ensure the brand’s reputation is not compromised.
It Is a Win-Win Situation
This arrangement presents a win-win situation for both parties. The licensor earns royalties without effort in producing or marketing the products created or sold by the licensee. On the other hand, the licensee enjoys consumer trust built through the years by the licensor of the products they sell.
For example, Calvin Klein is a renowned brand in the clothing sector. When a licensee uses Calvin Klein’s trademarks on their product, they will enjoy the same level of consumer confidence as any other Calvin Klein merchandise.
Which of the Two Is The Best?
“It would be unfair to say which is the best among the two since they both have benefits and drawbacks. Ultimately, the nature of the business you want to engage in will dictate what option is best,” says corporate lawyer Jonathan Barber of Franchise.Law.
If you have an already established product-based business that is doing well but hopes to take it to the next level, licensing may be your best option. If you are starting a business and prefer a low-risk business and access to mentors that can walk with you through the journey, the franchise model is the best option for you.