Franchising vs. Licensing: All You Need to Know

date icon 6 minutes to read date icon 8th November, 2022

In the business world where business expansion is the talk of the day, it’s crucial to know the differences between licensing vs. franchising so that you can make more informed decisions. 

Indeed, while both licensing and franchising share some similar characteristics, they differ in other key areas. These differences need to be kept in mind as you approach new business opportunities. 

So, without further ado, let’s explore what the differences between franchising and licensing are as well as what they offer business owners. But first, what do these terms mean?

What is franchising?

Franchising can be considered a business model through which a franchisor grants a franchisee the right to operate the business in an exclusive territory. To achieve this goal, the franchisor would enable the franchisee to use the brand, intellectual property and other proprietary assets of the parent brand in order to expand the business into new locations and markets.

The franchisee, on the other hand, is required to run the business in a manner that is specified by the franchisor as well as to pay an initial investment fee in addition to ongoing royalty payments (and in some cases, marketing and advertising levies). Franchising is usually service-based.

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What is licensing?

Licensing is different from franchising because it involves a well-known brand that provides products to the market, enabling other licensees to produce these products, sell and market them to reach a wider audience. In such a case, the licensee receives the rights to use and manufacture the products under the intellectual property of the licensor. However, they are extremely limited in terms of business operations and levels of support.

Whereas a franchisee will have the franchisor’s ongoing support, the licensee will deal with its sales, marketing and business expansion efforts on their own. In addition, the licensee works as a separate entity to the parent company without any territorial authority, meaning that it could face competition from other actors or licensees operating in the same region.

Pros and cons of franchising

With the concepts of franchising and licensing explained above, you might be wondering if franchising is a good investment. Let’s explore some of the benefits of the franchising business model below as well as some of the drawbacks:

Advantages of franchising

  • A proven business model that is also in most cases profitable and recession-proof
  • Guidance and training is provided by the franchisor
  • Consistency across the brand (same look and feel wherever you may go)
  • Marketing and advertising support are provided
  • Benefit from a strong franchisee support network
  • Be in business for yourself but not by yourself
  • You’re self-employed and don’t face the risks of beginning a business from scratch
  • Take advantage of a pre-established customer base
  • More affordable than starting a business from the ground up
  • Empowers franchisors to scale quickly
  • Empowers franchisees with skills to run their own business
  • The depth of the relationship in the franchise agreement offers many opportunities
  • Lenders are more willing to offer financing opportunities to franchisees
  • Economies of scale
  • Working with a large, well-known brand
  • You’re usually granted an exclusive territory, avoiding competition with other franchisees.

Disadvantages of franchising

  • Limited control for franchisees as executive decisions are made by the franchisor
  • Franchising can be costly with the initial investment and the ongoing fees
  • Some franchisees may require a specific skill set before a franchisee can get started
  • Prior experience in the industry may be a requirement by some franchisors
  • Franchisees do not own the intellectual property of the parent company.

Pros and cons of licensing

Although licensing is used by brands that are highly recognisable and marketable and it involves “loaning” your brand for another company to use, licensing also comes with advantages and disadvantages. We present some of these below:

Advantages of licensing

  • More control over their business operations
  • Consumer confidence in the quality of the product
  • Greater exposure for lesser-known brands
  • A secure investment and a good way to grow your business
  • The agreements are generally simple and straightforward
  • The licensor doesn’t control the licensee’s business operations
  • More freedom over marketing and sales
  • Licence fees are paid to the licensor by the licensee.

Disadvantages of licensing

  • The brand should already be known to a wide segment of consumers
  • You are limited in terms of using protected trademarks in terms of your agreement
  • You’ll require protection related to your intellectual property
  • Licensing agreements can be confusing and they may cross boundaries with other types of agreements
  • Licences are usually non-exclusive, although they can be exclusive in some cases
  • No training and support is provided by the licensor
  • You can enter into direct competition with other licensees
  • Licensees usually bear the business development and expansion costs.

Which is better licensing or franchising?

With the above in mind, it should be clear that licensing is not an alternative to franchising. In fact, there are hardly any alternatives to franchising as this is a highly specific and specialised business model. As a result, there is no simple answer to the question of whether licensing is better to franchising because each business model is quite unique from the next.

For example, some of the key differences between licensing and franchising include the following:

  • Limitations: licences are usually much more limited in scope than franchises. This is because licensing offers limited use of a registered trademark and nothing else. A franchise, on the other hand, offers use of trademarks in addition to further intellectual property, products, services, operating manuals, etc.
  • Control: in franchising, the franchisor uses their operations manual to set out exactly how a franchise unit – whether a single-unit or a multi-unit franchise – should be run. As a result, the franchisor exercises great levels of control over the franchisee. In contrast, a licensee is not bound by control of the licensor in terms of business location or operations. Instead, the licensee should primarily focus on how protected trademarks are and should be used. They are unable to exercise any control over the licensor.
  • Type of business: licence businesses are typically those that are involved in the production and manufacturing of products. For example, clothing and consumer goods. Franchising, meanwhile, more often than not deals with the provision of services to a clientele. For instance, franchisees can operate restaurants, cleaning services, auto repair shops, etc.

Concluding remarks

Overall, when looking at these two business models, the most important question that’s left to be answered is what is the difference between licensing and franchising? In short, franchising is more service-oriented as opposed to licensing, which is more product oriented. Whereas both models grant a party rights to use their intellectual property, these rights are more limited for a licensee than a franchisor. In addition, franchising offers more opportunities for franchisor support compared to licensing.

Licensing primarily deals with a business model that does not set out to the licensee how the business should be conducted but rather, how the intellectual property of the licensor will be used. Franchisors stipulate to their franchisees how and where the business should be run and operated from as well as granting franchisees the right to certain benefits such as initial training and ongoing support. The latter is not granted to a licensee at all.