Updated April 20, 2023
Introduction to Licensing vs Franchising
Licensing is a million-dollar retail market worldwide. But a license isn’t an instruction for immediate success. It offers you the borrowed interest of a name that is either exclusive or has several consumer acceptance. However, it still takes high-quality selling as well as marketing to succeed. A license is, in essence, a tool, and when utilized well, it’s a tremendously gainful advertising tool. Franchising a business can be very profitable and provide exponential growth; otherwise not possible. It allows the franchisers to expand their businesses manifold, which means generating more profits and more capital gains.
Franchise vs Licensing
Whether you embark on an Affiliate Franchise or the most popular franchise Business Format, you will experience several franchise advantages and disadvantages. As stated before, a franchise is defined as a contractual agreement in which the owner of a business concept gives a business person the right to own and operate a business based on that concept.
The article on franchise vs licensing agreement is structured as below:-
- Advantages of Buying a Franchise
- Disadvantages of Buying a Franchise
- Benefits of Franchising a Business
- Benefits of Licensing a Business
- 3 Main Advantages of Licensing a Business
- Franchise vs Licensing Infographics
- The relation between franchise vs licensing
- Conclusion – Franchise vs Licensing
3 Important Points of Licensing vs Franchising
Below is some important point.
- Name Recognition – When starting a new business, the biggest challenge is establishing your name. Customers have no idea what your new business is like or what products or services you provide. When buying a franchise, you jump into an established name with a proven record of success.
- Financial Support – There are many ways to obtain the capital necessary to purchase a franchise. You can secure a bank loan, ask family and friends, or contact the Small Business Administration (SBA) about a guaranteed loan.
- Site Selection – Some franchises belong to certain locations. A franchiser knows where a hair salon, dessert bar, lawn care service, or tattoo parlor will generate the most franchise sales. Most franchisers will assist you in selecting a site that will work best for your franchise’s business.
Franchising vs Licensing Advantages Disadvantages
3 Important Point Franchising vs Licensing Advantages and Disadvantages.
- High Cost – The costs of purchasing a franchise can be very expensive. The franchise’s costs typically vary according to the type of franchise that you buy. The fee can range from $5,000 to $50,000 or more.
- Loss of Control – Once you purchase a franchise, it is required to abide by a set of guidelines set forth by the franchisor and outlined in the franchise agreement.
- Share in Problems of the Parent Company – Just as a franchisee experiences the franchises’ successes, he or she must bear the failures. Once you have bought into the name, image, products, and services, you cannot separate yourself from the parent company when times get hard.
Benefits of Franchising a Business
Your business is running, and your customers are coming from near and far to buy your products or services. It might be time to franchise your business if you think it is unique enough to expand a new branch into every town to maximize your brand presence.
Another benefit of franchising a business is the lower capital requirement. Franchisers can limit their franchise costs by opening a chain store rather than a second one. The franchiser will only need to pay for training and administrative aspects once a franchisee acquires one branch. Franchisees need to bear a certain part of the day-to-day running expenses of the business and keep control of the daily affairs.
This saves the franchiser of botheration that otherwise would have fallen on their shoulders had they opened a new branch under their direct supervision. However, to start a franchise, franchisees need to have a significant amount of cash. Although they may pay an upfront franchise fee, franchisees will be assisted by the parent company at the start of the business. This includes arranging the lease agreements, designing and constructing the franchised store, and the franchise marketing strategies.
Franchising allows you to grow without sacrificing control over the business. You may not have minute-by-minute control, but you control how franchisees should operate the business; you create and dictate the operating system. If franchisees don’t follow your system, you can revoke the franchising agreement and take back the business. This is another benefit of franchising a business.
Knowing how to franchise your business is essential. There are different ways in which a business owner can convert his traditional business into a franchise model. You will want to consider the best franchise opportunities that match your lifestyle, business, and financial goals. Without knowing how to franchise your business, you could spend much time and effort trying to find the exact way.
Hiring a franchise consultant is not only the best bet when considering franchising your existing business but also essential. Franchise consultants provide different franchise services, from buying a franchise to franchising an existing business. The franchise consultant will devise a plan to ensure you are going in the right direction.
Franchise consultants and your franchise attorney provide you with franchise services to establish your initial franchise business plan, help iron out any questionable details or omissions, and design the best proposal to present to the marketplace. Also, they can assist you in finding the best franchises to invest in your company and successfully match you with partners who are more likely to maintain your brand’s integrity successfully.
Franchising a business can be an effective tool to ensure its growth and larger market share. Many businesses have gone this route and become global leaders in their line of operation. Such franchised companies include McDonald’s, KFC, Domino’s, Pizza Hut, and many more… However, franchising cannot be tailored to every business owner. So, talking to franchise experts before you start franchising your business is advisable.
Benefits of Licensing a Business
A business arrangement in which one company offers another company permission to manufacture its product for a specified payment.
There are a few faster or more gainful ways to produce your business than by licensing patents, trademarks, copyrights, designs, and other intellectual property to others. Licensing lets you instantaneously tap the accessible production, allocation, and marketing systems that other companies may have spent decades building. In return, you get a percentage of the income from products and services sold under your license. Licensing fees typically amount to a small percentage of the sales price but can increase rapidly.
3 Main Franchising vs Licensing Advantages Disadvantages a Business
Licensing provides three main franchise advantages.
- It may signify you have something exclusive your competitors don’t.
- Secondly, it may signify getting a little-improved margin as it’s exclusive.
- And thirdly, it may denote that 10 percent of the retailers you identify with that you’ve never been capable of selling to will ultimately take a look as you have something diverse. And when that happens, you can sell the rest of your line.
Franchise vs Licensing Infographics
The Relation between Franchise vs Licensing Advantages and Disadvantages
- For a corporation and a company that appears to get bigger, franchising and licensing are regularly engaging in business and trade. In a replica of franchising, the franchisee utilizes another firm’s flourishing business model and product name to function in what is effectively a self-governing company division.
- The franchiser preserves a substantial amount of power and control over the process and procedure utilized by the franchise, other than also franchises, helps with things like branding and advertising, and promotional support that assists the franchises. The franchise, moreover, typically ensures that branches do not cannibalize each other’s revenues.
- Under the category of licensing model, a corporation or company advertises and promotes licenses to other (usually lesser) companies to work out the intellectual-based property (IP), the brand, and the design of trade and business. These licenses are usually non-exclusive, which means they can be advertised to competing franchised companies serving the comparable market. In this understanding, the licensing company might possibly work out power over how its IP is utilized but does not systematize the licensee’s business operations.
Both the Franchise vs Licensing models requires the franchise and the licensee to pay for the innovative business that owns the brand and intellectual property. A few laws govern the franchising model and describe what constitutes franchising; several agreements are legally viewed as franchising even if they were originally drawn up as licensing agreements.
Franchising is tremendously luxurious. So, licensing can be a fine way to establish if you are concerned about franchising your business. Rather than plunging straight into franchising with all the due meticulousness and formalities that it entails, you could establish by discovering a small number of licensees willing to license a few or all of your business model. (Although lookout that in several countries, like the USA and certain parts of the EU where franchising is greatly regulated, you desire to avoid calling what is fundamentally a franchise a license. It is unlikely to run away from the regulators’ notice. Franchise vs Licensing will appear in the spirit of conformity rather than its name).
Whether you are licensing or franchising, defending your IP is significant. Your brand, the patents, know-how, trademarks, etc., are valuable assets which should not be shared carelessly. So it’s not about franchise vs licensing, but the terms on which you grant franchise vs licensing must be cautiously measured.
This has been a guide to Franchise vs Licensing. We have discussed the basic concept, 3 Important Points, and benefits, respectively. You may look at the following articles to learn more –