Franchising vs. Licensing: Which is Best for Your Business?

When a company decides to expand, they often choose to let others in on the act through licensing of intellectual property or franchising. Some inexperienced entrepreneurs may think franchising and licensing are interchangeable concepts, but they have different meanings both practically and legally. And as with most types of business arrangements, they have different advantages and disadvantages.

So, What’s the Difference?

Probably the biggest difference in franchising versus licensing is in their scope. For example, licensing refers to the legal right to use a specific limited asset, such as a trademark, technology, or formula. A franchise, on the other hand, duplicates a company’s entire business model, including how it is operated and what specific products and services it provides, including brands and trademarks. With licensing, a company limits only how a licensed asset is used, but with franchising, the company determines how the franchisee will operate the business in total.

Which Option is Best for You?

Whether you will benefit more from a franchise versing licensing agreement depends largely on your business objectives and experience. In comparison to franchising, licensing is a standalone concept. You pay royalties for the rights to use a licensed asset, but it is up to you how it factors into your business plan. Licensing may work well for an existing business wanting to integrate a new idea or product but may be more challenging for a startup with little knowledge or understanding of how to exploit the asset.
Franchisees receive not only the rights to use a company’s branded assets, but also have access to the business’s operations protocol, including marketing, implementation support, and training, on an ongoing basis. Having this support infrastructure is often exactly what many new entrepreneurs want and need, even when there is some loss of autonomy in how the business is run. After all, franchisors are offering a copy of their business and all the “tools” needed to get it up and running smoothly and keep it that way. Having this groundwork laid and a customer base at the ready are some of the advantages that franchises are known for.

From a Legal Perspective

While licensing is a matter of standard contract law, franchising has considerable federal and state government oversight intended to protect the partners in what is a complex relationship. In fact, federal law sets the stage for whether a business arrangement is defined as a license versus a franchise. By law, a business is legally considered a franchise of a company if the following three criteria are present: the business is operating under the company’s name or trademark; the business has contractually agreed to follow the company’s prescribed, uniform system of running the business; and the payment of an upfront fee has been made from the business to the company.

Franocity Can Help

Though it may seem confusing, licensing and franchising are quite distinct in how they function. With proper guidance, it will become less difficult to determine which framework best suits your style and experience. Franocity professionals have a rich knowledge of the market and offer free consultations to those exploring starting a business. Fill out this brief form, and one of our consultants will reach out to you.

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