If you’ve started looking into your options for business ownership, then you might have come across the terms “franchising” and “licensing”. Franchising and licensing agreements share some similarities in that they grant certain rights to other parties, providing business opportunities to aspiring entrepreneurs. However, it’s important to understand the differences between franchising and licensing if you’re deciding which business route to pursue. On the most basic level, the difference between the two methods is the amount of support you can expect to receive and the level of control exercised by the licensor or franchisor.
Franchising agreement: A comprehensive relationship where, in exchange for fees and royalties, a franchisor grants the franchisee the right to operate a business under its established brand and business system.
Examples include business locations like: McDonalds, Jiffy Lube, Hilton, etc.
Licensing agreement: A more limited relationship where, in exchange for fees and royalties, a licensor grants the licensee the right to use its intellectual property, such as trademarks, patents, copyrights, or trade secrets.
An example of this is when a technology company develops a new software product and enters into an agreement with other businesses to license its software, allowing them to incorporate it into their products or services.
Another example is when a business allows another company to license its brand or trademark for a product, making it more recognizable. For instance, Walt Disney might form a licensing relationship with McDonalds allowing the fast food restaurant to co-brand their Happy Meals with a trademarked Disney character.
In short, a franchised system will provide more support in site selection, training, marketing, and more. However, this comes with a higher degree of control of the franchisee’s business operations. A licensing agreement doesn’t come with much support, but the licensee will still hold full autonomy over the business.
Franchising vs Licensing: What is the Difference?
Both a franchising and licensing partnership can help jumpstart your business by giving you access to proprietary technology or an already established brand or trademark. However, they are two very different approaches to business ownership.
3 Differences Between Franchising and Licensing
- Business Goals
The purpose of a licensing agreement is to form a partnership with an independently operated business in order to monetize a trademark or technology. However, a franchise agreement allows franchisors to partner with franchisees in order to grow their brand to multiple locations with uniform operating procedures.
- Levels of Control
License agreements grant rights to a trademark or technology, but the licensor does not have control over how licensees operate their business. Conversely, franchise agreements include standard operating procedures that the franchisee must adhere to.
- Legal Regulations
While license agreements fall under general contract law, franchise agreements are governed by federal and state franchise laws.
How to Decide Between Franchising and Licensing
While both franchising and licensing can benefit an individual pursuing business ownership, deciding which is the best option will vary from person to person. The answer largely depends on the prospective business owner’s needs and desires. Here are three questions to ask yourself as you weigh the pros and cons:
- Does the franchise you are interested in have a proven track record of success?
If so, then you can be reasonably confident that you will succeed as a franchise business owner so long as you follow the operating procedures laid out for you. Being able to look at examples of successful franchise owners preceding you in the space is a huge advantage if you decide to pursue franchise ownership.
- Are you looking for a smooth entry into business ownership?
If you’re looking for an entry into business ownership with less barriers, then a licensing agreement might interest you more. A licensing agreement is generally less complicated and easier to finalize than a franchise agreement.
- Do you prefer to follow a proven process or do things on your own?
Essentially, you need to decide whether you want to buy a franchise or own your own business while pursuing licensing opportunities.
If you want to have more autonomy in business decisions with the freedom to make your own vision come to life, then you should pursue a licensing agreement over a franchise agreement. However, if those aspects of entrepreneurship stress you out and you prefer to have a business structure that’s already been proven to work, franchising is likely the better choice.
Ultimately, there’s no inherently right or wrong way when it comes to choosing a franchising or licensing relationship. The “right” option will completely depend on each individual’s unique goals and abilities.
Are You Interested in Franchise Ownership?
If you are interested in franchise ownership but not sure where to start, then FranNet can help! At no cost to you, our expert franchise consultants will evaluate your personal goals and skills in order to connect you with the right opportunity. We have hundreds of verified brands to choose from! We will provide you with the support and resources you need every step of the way. Reach out today to schedule your free consultation!