Franchising vs Licensing: What is the Difference?

May 16, 2018 | General

When deciding to open a business using an already established brand, you may have heard people talk about franchising and licensing. There is a difference between these two business models, but what exactly is that difference?

Let’s take a look.

On the most basic level, the difference between a franchise and a license is the amount of support you can expect to receive. A franchised system will provide you with support in site selection, training, marketing and much more, whereas a licensing agreement provides you with little to none of that.

Franchising

Businesses usually start franchising once their business models have been perfected and proven to make money and their brands have at least some regional recognition. So, not only do you get to leverage the brand’s name, but you also get access to all its support systems in exchange for a fee.

In franchising, you run your business the way you’re instructed to run it because the franchisor doesn’t just retain control over the intellectual property (the brand), it also retains control over how the franchise business is operated. You put up the capital to start the business, but the franchisor supplies you with the know-how to run the operation according to their business model.

Licensing

At the other end of the spectrum is the licensing model, where you pay for the use of the intellectual property, but you are free to run your business however you like. The brand that gives you the license may specify the purpose their intellectual property is to be used, but they won’t provide you with any support like site selection, training, marketing or any of the other support systems you enjoy when you are part of a franchise system.

Often, a licensing agreement is entered into between a brand and someone who has an existing business who just wants to expand their product line, so this lack of support might not be a big deal to people with an established business.

Which one is best for you?

While licensing agreements can be drawn up and put in place quickly and for little cost to a brand, franchising agreements take a lot more work.

Which one works best for you will depend on how much control over the running of your business you want to retain and how much assistance you want. When you license a brand, you do get the benefit of whatever brand recognition it has garnered, but you are pretty much on your own for running the business. Again, this may not matter if you already have an established business.

When you franchise, you get the benefit of brand recognition, but also a lot of support in the running of the business within a set system. If you have your own business already and decide to join a franchise, this will mean giving up control of how you currently run your business.

Another consideration is cost. A licensing agreement will be cheaper than entering into a franchising agreement. However, since you get little to no support when running a business with a licensing agreement, you will be responsible for all other costs associated with the business, which would normally be included in a franchising fee.

For example, with a licensing agreement, you would have to lease or own the building yourself, do all your own marketing and training. In a franchise, the franchising fee would cover the lease and buildout, it would likely get you some national marketing from the brand and the franchise would likely have training for you and your staff.

This may make running a business with a licensing agreement and running a franchise comparable cost wise.

And, lastly, there is also the matter of legal protection. There are specific franchising laws in place in six provinces in Canada to protect franchisees. Licensing agreements are not covered by these laws, although sometimes a licensing agreement can actually end up being viewed legally as a franchising agreement.

Here at FranNet, we firmly believe franchising is the way to go. The amount of support a franchise offers you is invaluable. FranNet can help you find the perfect franchising opportunity. If you believe you’re ready to take that first step toward business ownership, sign up for a free FranNet franchise search and consultation today.