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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.
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.
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.
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 |
The following are the different types of franchising that you should know:
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.
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 food franchise business, restaurant franchise business and many more.
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.
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.
The following are the different types of Licensing that a business may utilise:
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.
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.
A franchise can have multiple owners. Multi-unit franchise owners have a greater chance to grow and gain success.
A franchise differs from a licence in terms of the degree of allowance too. The former agreement is broader than the latter. The licence allows the use of only registered trademarks, whereas a franchise allows the use of trademarks, products, services, additional intellectual property, and much more.
A licence agreement is usually valid for 11 months. It can be renewed again for another 11 months.
A franchise agreement lasts for 5 to 20 years. Moreover, the validity of this agreement depends on the size of the franchise's initial investment, market conditions, and the type of franchise.
McDonald's, Subway, and Dunkin Donuts are some examples of franchises. On the other hand, examples of licences include a company using popular character design like Mickey Mouse on their products.