What’s the Difference between a Franchising and Licensing Model?

If you stumbled upon these two terms, chances are you’re an entrepreneur looking to make more money or someone who wants to get a head start in entrepreneurship. Business owners have been using licensing and franchising as expansion strategies for the last few decades. And, both can help you achieve your goals.

Franchising

A franchise is an asset of a brand. It falls under the federal securities law. A brand can use franchising when they want to expand, as a franchise is an extension of an existing business or brand.

When you buy a franchise, you pay fees to use the brand name and proprietary information, to participate in their standard operating system, and the right to operate a business. Many entrepreneurs find franchising appealing as franchised businesses offer a diversity of services and products. It’s an opportunity to expand and scale their business.

Some of the most famous brands in the world are franchises, including 7-11, McDonald’s, and Subway. McDonald’s is a great example as they have more than 30,000 restaurants in more than 100 countries—and they started with one.

Businesses that franchise their brand get to keep a huge amount of power. As a franchisor, you decide in which location each franchisee can operate. The franchisor also supplies the business model.

Licensing

A licensor sells the licensees the right to use their trademarks, products, and other intellectual property in exchange for royalties. In most cases, it’s a percentage of the sales the licensee makes. As a licensor, you still retain your intellectual property and ownership of goods.

Calvin Klein is a notable licensor. When you buy a pair of Calvin Klein underwear, chances are it wasn’t actually made by Calvin Klein. The only clothes that Calvin Klein makes are some of their women’s clothing lines.

Calvin Klein jeans, perfumes, and other garments come from a licensing agreement. Businesses license the Calvin Klein logo and name as it helps them sell their own products.

Disney is also a famous business in the licensing world. Their Consumer Product Branch license characters and images to a wide variety of businesses.

Every famous Disney princess is licensed. As a result, you can see them on kid’s pajamas, T-shirts, personal care products, furnishings, and even wedding dresses.

Warner Bros, Disney’s main competitor, also profits from the licensing model. They are licensing their theme park rights to Universal Studios.

Franchising: Pros and Cons

If a business purchases a franchise, they become a part of a brand that has loyal followers. If you are a franchisee, you still remain self-employed.

Becoming a franchisee typically costs less than starting your own business from scratch. If you are a franchisor, you can expand your business without investing too much of your own funds and even gain a monopoly within a certain area.

As a franchisee, you don’t have to imagine what your business will look like if it succeeds—you can literally see it in other franchisees. In your relationships with suppliers and vendors, you can leverage the economies of scale.

But, since the franchisor calls most of the shots, franchisees don’t have full control of their business. For some, that can be a perk as it relieves them of certain responsibilities they would have to carry if they were completely on their own. Since the franchisor collects fees from franchisees, some franchisees are not able to earn as much as they could if they had their own business.

Licensing: Pros and Cons

Licensing is a great passive revenue opportunity for licensors. The licensor gets a cut from the licensee’s profit without having to do any work. Similarly to franchising, licensing allows licensees to harness the power of the licensor’s brand to sell their product.

For instance, even though Calvin Klein’s licensees pay royalties to Calvin Klein, they still make much more money than they would by selling no-name products. Even though they are not obliged to, many licensors give guidance and help to their licensees. For instance, the fire ductwork system Thor offers licensees training and support.

Small businesses often do not have the funds to research and develop new or better products. Through licensing, they can gain access to advanced technology that would be difficult or even impossible to get otherwise.

One of the disadvantages of licensing is that both the licensee and licensors can run into problems if regulators consider their agreement to be collusive or anti-competitive in nature. An intellectual property license can also add a layer of expense to the product. Since the licensor has no control of the licensees’ businesses, a licensee may ‘damage’ the licensor’s brand and thus jeopardize other licensees as well.

Conclusion

As you are waging the pros and cons of franchising or licensing, consider the resources you have available, as well as your goals. Both of these models allow you to make more money, but both of them will also take something from your business—no matter which side of the agreement you are on. What are you willing to exchange for success?

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