Franchising vs Licensing

Difference between Franchising vs Licensing

A Business Model is an organizational rationale, strategy and operational techniques that would be used by a particular Business\Economic entity to generate revenues and margin for its sustained growth. There are many business models available from a domestic an on an international scale. Out of which, the most common is Franchising vs Licensing.

Both these trading models are focused on utilizing the local entrepreneurial talents by an Established Parent Organization, where there will be a mutual business understanding between them. This understanding would be codified in a legally enforceable agreement, where the parent entity would specify the agreed norms and conditions, royalty fees, and maintenance of accounts in clear terms with the Franchise\Licensee. This arrangement could be in both Domestic or International dimensions.

Following are the two main forms of prominent International\Domestic trading models:

Licensing – This is a model in which the Licensee (local business) will attain the intellectual property (Trademarks, Patents, Copyrights etc.) of the Licensor (Established Entity) for an agreed royalty. Upon which the Licensee would contribute appropriate capital investments to set the business running in his\her localized location. Example – Ranbaxy Laboratories

Franchising – It is defined as a specific business model in which wherein the Franchisee (local person) attains the business model, processor brand name, for an agreed fee for purpose of functioning as an independent branch of the Franchisor (original organization). Example Mc Donald, Burger King etc

Franchising vs Licensing Infographics

Below is the top 5 difference between Franchising vs Licensing

Key differences between Franchising vs Licensing

Both Franchising vs Licensing are popular choices in the market; let us discuss some of the major Difference Between Franchising vs Licensing:

Fundamental Concept – The main concept in Licensing is an ability to sell the Intellectual Property or technological know how to any number of Licensee Companies by the Licensor Company for an agreed royalty (on sale). Whereas in Franchising, the Franchisor will in effect launch an independent branch with one specific Franchisee (local company) in a location for a specific fee.

Control by the Parent – Licensing agreements would include the acquisition of intellectual rights and privileges but not subject to the managerial directions from the Licensor to a Licensee. In the instances where the managerial directions, supervision, norms, and regulations from the Parent is binding on the host, it is called Franchising.

Services and Training – A licensor normally does not give services and training to the Licensee post the commencement of agreement, while a Franchisor is bound to provide services and Training to the franchise as per the agreed understanding.

Compensation – In-Licenses, the Parent and the Local company will have to be registered, and there would be a series of negotiations on the Royalty\Licence Fees by the parties concerned. While in Franchising, although the registration is not mandatory the fee structure is pretty much standard, and there is little room for negotiations.

Applicability – Franchisee is applicable to those local organizations who do not have the sophisticated technical and operational infrastructure to manage the business. Here the parent company (Franchisor) will give appropriate guidance and territorial monopoly. Whereas in Licensing the Licensee (Local Company) needs to have sophisticated technical and operational facilities because the Licensor can sell his IP to any number of people and you should have the individual capacity to compete with them all.

Developmental Costs – In licensing the Licensor will be incurring a particular development cost (R&D expense) to attain the intellectual property that will be recouped through Royalty fees from the fellow Licensees. While in Franchisee, the Franchisor will charge a specific fee to encash its Goodwill / Brand Name to generate business in the local area in return of a standard Franchisee Fee from the Franchisee.

Head To Head Comparison Between Franchising vs Licensing

Below is the top most comparison between Franchising vs Licensing

The basis of Comparison between Franchising vs Licensing	Licensing	Franchising
Concept	It is a Legal arrangement in which an organization (Licensor) will be selling the intellectual property rights to the local company (Licensee) for a royalty.	It is a Legal system where the Franchisor (Original Company) will permit Franchisee (Local Company) to use its business model and brand for a specific fee like an independent branch.
Compliance Aspect	Licensing is governed by the respective Contract acts at a national level, and at an international Level via the Paris Convention i.e., TRIPS (Trade Related Intellectual Property Rights).	They are protected by the respective Franchise laws of their own territory. As of now an international law specific to Franchising has not been made.
Sphere of Control	The Licensor may entail some control on the intellectual property given to the Licensee but have no control in the particulars of his business operations.	The Franchisor can exert considerable control over Franchisee business and operational models, by establishing norms, inspections, and maintenance of accounts.
Nature	It involves a single time transfer of the specific intellectual property by the Licensor to the Licensee, where the training and support are not being provided.	It involves consistent ongoing assistance by the Franchisor to the Franchisee, where the training and support were also being provided.
Territorial Monopoly	The Licensor can sell his Intellectual Property to multiple Licensees in the same economic territory. Hence there is no implicit monopoly in licensing.	A franchisor can only appoint one specific Franchisee as its independent branch in a specific economic territory. Hence monopoly rights are allotted.

 

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Conclusion – Franchising vs Licensing

In this Franchising vs Licensing article, we have seen both Franchising vs Licensing models are widely considered as Cheap and Feasible trading models by big parent companies for entering into a specific economic region. Even in both of these cases, the parent company would not be suffering the losses (as Licensee gets Royalty, Franchisee – Franchisee Fee, generally with no cost obligations to the local entity), and could, therefore, hedge out from the business risks involved in the area.

As in both of the above models since the business is carried out by a local company, there would be a higher probability for the parent company to gain in the long run, because the Local company would have a better market knowledge in the specific area, and also would have the appropriate contacts to materialise deals. Usually, in some nations when the Governments feel that a Foreign company is earning exorbitantly, there would be a possible regulatory restriction or even a takeover. But having a localized Licensing or a Franchisee agreement in the said nation would insulate the parent company from facing any possible regulatory or legal risks in the event of regulatory action.

But having discussed the above, the Franchising or Licensing models are not without its cons. There are numerous cases in which a Franchising or Licensing would be starting an identical product or business that could become a tough competitor to the very Licensor or Franchisor itself. The local Franchisee or Licensee who attains the trade secrets or other confidential information from the Franchisor or Licensor could even pass on the same to the Competitor of the Parent company (i.e. Licensor, Franchisor), which will harm its business Globally. Moreover, some of the past experiences have also sighted occasional conflicts with the Licensor by the Licensee on the payment of Royalty, and conflicts in the areas of maintenance of accounts, and non-adherence of norms between the Franchisor and Franchisee.

Overall Franchising vs Licensing is both a great way to expand one’s business, provided one carefully analyze long term the feasibility factors on each of these alternatives before entering into the same.

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