Difference Between Licensing and Franchising
Franchise and licence are two commercial contracts that allow sharing of specific brands in return for a price. It allows a company to promote its brand and expand marketing without incurring the full cost and risk of opening a new outlet in a different location.
There is a common confusion that both models are the same, but in reality, they are different. Both models involve a contractual relationship between two parties, but they differ in terms and conditions. In this article, you will get to know in detail the difference between licensing and franchising.
What Is Franchising?
Franchising is an arrangement that offers a great opportunity for business owners to introduce their products or services to a new market. It allows the company to borrow a brand name or business model in exchange for an initial fee and a royalty. The party who lends its name is called the franchisor, and the party who pays for the brand name is the franchisee.
The franchisor expands the product availability by offering franchises to different buyers, ensuring that customers' needs and demands are met. They also check that the particular product or service improves over time.
What Is Licensing?
Now to realise the difference between licensing and franchising you need to understand what licensing is. Licensing is a business model where a licensor grants a Licensee the right to use its intellectual property, such as trademarks, patents, copyrights, or trade secrets, in exchange for a fee or a royalty.
A licensor retains ownership of intellectual property and controls its use allowed to the Licensee. Industries such as software, publishing, entertainment, and fashion industries, where intellectual property is an asset key, use licensing.
What Is the Difference Between Licensing and Franchising?
The table below highlights Licensing vs franchising based on various parameters:
|
Parameters |
Licensing |
Franchising |
|
Governed by |
Contract Law |
Franchising regulations or company law, as applicable |
|
Registration |
Not mandatory |
Mandatory |
|
Degree of Control |
No control over the Licencee's business operations |
Has control over the franchisee's business operations |
|
Training and Support |
Usually not provided |
Provided by the franchisor |
|
Process |
Involves a one-time transfer of property or rights. |
Requires ongoing assistance from the franchisor. |
|
Fee Structure |
Negotiable based on the terms of the licence agreement |
Charges standard fees and royalties as per the franchisor's guidelines |
|
Cost |
Low |
High |
What Are the Different Types of Franchising?
The following are the different types of franchising that you should know:
1. Product Distribution Franchising
This type of franchise is based on a supplier-dealer relationship. Here a franchisor supplies the franchisee with a product or service to sell in a specific territory. Product franchisees usually deal with large products like cars, vending machines, computers, etc.
2. Business Format Franchising
The business format franchise not only gets to use a franchisor’s trademark but also the entire business operating including branding, marketing, training, and ongoing support. In this type of franchising, businesses from large-scale industries are franchised. The most popular franchises of this type include restaurants, fitness, fast food centres, business services, and many more.
3. Job Franchising
It is a low-investment or home-based franchise if you want to turn your business into a small franchisee. Travel agencies, plumbing, domestic lawn care service, drain cleaning, cell phone services, and many more fall into this type of franchising.
4. Conversion Franchising
An existing independent business owner converts their business into a franchise and receives support and branding from the franchisor. The franchisee adopts trademarks, marketing and advertising programs, training programs and critical client service standards in this type of franchising.
What Are the Different Types of Licensing?
The following are the different types of Licensing that a business may utilise:
1. Brand Licensing
It grants businesses the right to use a well-known brand name to market their goods, which can help to establish credibility and attract customers. This type of Licensing often involves using a brand's logo or associating a celebrity's name with a particular product.
2. Copyright Licensing
This type of agreement is between the owner of the copyright and someone who wishes to use this protected work for certain purposes. The Licensor grants the Licensee the right to use copyrighted material, such as music, films, or books.
To summarise, the key difference between licensing and franchising is that the former provides the right to use intellectual property, while the latter grants an authority to produce and distribute existing products.
Additionally, Licensing agreements tend to be less restrictive than franchise agreements, which often come with strict guidelines for how franchisees must operate their business.
