What Is the Difference Between Franchising and Licensing?

Franchising and licensing are both common methods used to grow a business. Although both options provide entrepreneurs with chances to expand their brand, generate income and establish a presence in new markets, they vary significantly in structure and implications. 

For example, Starbucks primarily operates company-owned stores, but it also provides licensing opportunities overseas, as well as at universities, airports and grocery stores in the U.S. Meanwhile, competitor Dunkin’ has franchising built into its business DNA.

If you're contemplating either approach, here's an in-depth examination of their key distinctions.

What Is Franchising? 

Franchising is a business model that allows individuals or groups (franchisees) to own and operate their own businesses using the established brand, products and services of a parent company (franchisor). In exchange for the right to operate under the established brand and receive ongoing support for their business, a franchisee pays fees or royalties to the selected brand. 

In franchising, brands offer training programs to ensure that franchisees clearly understand and follow an established business model. Franchisees may also receive ongoing support, including assistance in marketing, operations and any company-wide updates. 

When it comes to contracts, franchise agreements can differ by brand. Typically, the agreement includes three categories of payments to the franchisor: 

• The franchisee must purchase the trademark from the franchisor through an upfront fee. 
• The franchisor is compensated for providing training, equipment and other business-related services to the franchisee. 
• The franchisee pays ongoing royalties to the franchisor, or a percentage of sales. 

In most cases, franchisees also pay an initial franchise fee to the franchisor. This grants them the right to use the brand and access training and support. 

What Is Licensing? 

Licensing is a contractual arrangement where a licensor grants the licensee the right to use its intellectual property, such as trademarks, patents, copyrights or technology. In contrast to franchising, licensing is more focused on permission to use a specific aspect of a business instead of the whole business model. 

In a licensing agreement, the licensor retains less control over the licensee's operations, with limited involvement in day-to-day activities. The type of contract varies based on what is being licensed. Investopedia notes that licensing agreements alleviate any disputes related to sales, issues of quality, or royalties.

In addition to clearly detailing the parties involved, a licensing agreement also provides stipulations on exactly how the intellectual property can be used, such as:

• Geographical regions for property utilization
• Time periods allotted for property use
• Exclusivity or non-exclusivity of the arrangement
• Scaling terms for new royalty fees based on property reuse

Key Differences Between Franchising and Licensing

The most notable differences between franchising and licensing are: 

• Control and Involvement: Franchising involves higher control by the franchisor in overseeing and supporting franchisee operations. Licensing grants intellectual property rights with less direct control by the licensor in the licensee's business.
• Business Model: Franchising provides a comprehensive business model with operational guidelines, training and ongoing support. Licensing grants rights to intellectual property without necessarily providing a complete business framework.
• Brand Consistency: Franchising emphasizes consistent branding across all locations for a standardized customer experience. Licensing may result in variations as licensees have more flexibility in adapting the brand to their needs.
• Ownership: In franchising, the business belongs to the franchisee, who operates it for a fee. In licensing, the licensee pays for a specific product or rights without business ownership.
• Regulations: Franchising regulations are typically stricter and governed by company law. Licensing regulations are governed by contract law.
• Support: Franchisors often provide extensive support in setting up systems for franchisees. Licensing agreements usually do not come with as much support.

When deciding whether to go with franchising or licensing for your next business venture, consider factors such as your goals, resources and the level of control you desire. 

If you're looking to get into franchising, we can help! Whether buying your first franchise or building your portfolio, 1851 Growth Club will guide you through the buying process with honesty and integrity. Reach out today to learn more.