Franchising vs Licensing: Which is better for your business? Deciding between a franchise agreement or a licensing agreement can be confusing. It is essential to carry out your due diligence before making any major business decision.
So let’s look at the pros and cons of each. Both franchising and licensing are legal partnerships: which one represents a better opportunity for you? But first, a quick reminder of what they are and how they differ.
What is franchising?
Franchising is a partnership in which one party allows another to borrow its business model or brand name. This is usually done at a fee. The party which lends its name or business model is called the franchisor, while the party paying for the permissions is the franchisee.
- Upside of franchising
Franchising has several benefits. As the franchisor, it expands your customer base while maintaining the value of your brand. Another upside of franchising is that the franchisee bears the cost of upgrading their business premises to meet the standards of the brand. In return, the franchisee gets invaluable mentorship. Sounds like a win-win situation, right?
- Downside of franchising
However, in order for a business to become a successful franchise, it must first be well-established with a profitable business model and a strong, recognisable brand.
What is licensing?
Licensing is also a legal partnership between two parties. In this type of arrangement, one party (the licenser) sells the rights for the use of its intellectual property to the licensee. The licensee can then manufacture the products of the licensor, while paying royalties to the licensor.
- Upside of licensing
A license arrangement is generally easier and cheaper to set up than a franchise concept. Ongoing management is also less demanding.
- Downside of licensing
However, you are giving up a lot of control over the quality of the products and services the licensee will provide, and this could damage your reputation.
So, if they both involve paying for use of information, you may be wondering: what’s the difference?
5 Differences between franchising and licensing
Although their definitions sound similar, there are noticeable differences between franchising vs. licensing.
1. Business model:
The first difference is in the business model. Franchising only deals with the provision of a service, while licensing can be for both services and products. For example, a restaurant or a salon can be franchised, but not the products they use to provide the said services.
2. Control & influence:
Secondly, there is the factor of how much control the two parties have. In franchising, the franchisor has a big influence on how the franchisee runs the enterprise. This means that the franchisor controls crucial decisions such as marketing strategies used, and even the quality of service provided. The franchisee has little wiggle room in decision-making. However, in licensing, the licensee can make decisions on what to do with his own products or services, without the need for approval from the licensor.
The third difference is in the processes used. In franchising, the franchisor (the seller) provides the franchisee with the assistance of setting up the required systems. Licensing agreements do not typically come with such technical support.
The fourth difference is with the ownership. In a franchise partnership, the business belongs to the franchisee. The franchisee essentially runs the business for the franchisor, but at a fee. In a licensing partnership, the licensee only pays the licensor for a specific product, for which the licensor may have taken out patent rights. However, the rest of the business, which doesn’t need the products of the licensor, may continue running independently.
Finally, the regulations for franchising tend to be stricter. Franchising regulations are governed by company law. This differs from licensing regulations, which are governed by contract law.
Finding Licensees to Grow Your Business
The process of finding licensees is similar to finding franchisees. You want to create marketing material and website content that explains the opportunity and benefits for the buyer.
When it comes to finding these prospects, it’s important to create a persona of your ideal licensee and to develop a lead generation campaign that targets those specific candidates. In addition, you’ll want to keep nurturing any leads that do show interest with lots of great follow-up content which could be done in the form of an automated email sequence.
It can be very challenging to find quality licensees or franchisees that are ready to invest but you don’t have to do it alone. We offer a number of very effective marketing programs to tackle franchisee and licensee sales. Feel free to reach out for a complimentary consultation if you want to discuss!