Both franchises and licenses are commercial contracts that allow for the sharing of specific brand elements in return for a price. A franchising agreement, on the other hand, covers a company’s whole brand and activities, but a license deal only applies to registered trademarks. Franchises often work best for service-based businesses, while licenses are more suited to product-based businesses.
Despite some similarities, licensing and franchising are two different things. In this article, we’ll outline the distinctions between the two as well as the pros and cons of each.
Franchising VS Licensing
| Franchising | Licensing |
| It is an imitation of a company with a licensing element | It allows permission to utilize a certain class of intellectual property rights |
| It permits cloning of a business from A to Z by a franchisee | Intellectual property that has been granted a license includes brand, patent, technology, design or other assets that belong to a licensed business |
| Example: Brand A outlets in a variety of locations offer Chinese cuisine using the same SOP | Example: An outlet is selling pizza at another location under the Brand A name |
TLDR; The Pros & Cons – Franchising & Licensing
| Franchising | Licensing | |
| Pros | Less risky and pay less than starting a business from scratch | It provides the licensee flexibility and safe investment |
| The shared relationship | The simplicity of the agreement | |
| The closeness of the bond between the franchisee and franchisor | ||
| Cons | The loss of control | The limitations |
| More expensive and complicated than licensing | Many people are unclear of their actual purpose | |
| Not interchangeable between franchising and licensing |
Franchising – Pros
Franchisees can be self-employed without the risk of forming a new business. Franchises have a proven business strategy and consumer base. Buying a franchise is less risky than establishing a business from scratch and pay less.
The pro of franchising is the shared relationship. The franchisor can quickly expand their business while delegating to franchisees a portion of the job. The franchisee collaborates with the franchisor to run the company and develop business skills.
Another pro of franchising over licensing is the closeness of the bond between the franchisee and franchisor. Despite the franchise agreement’s complexity, it offers a variety of opportunities.
Franchising – Cons
The loss of control is one of a franchisee’s cons. Despite the fact that it is your business, the franchisor will make the majority of important business choices or at the very least must be authorized by them. An experienced business owner could feel that they are being micromanaged.
Franchises are more expensive and complicated than licenses. Franchise fees can range from $10,000 to $50,000, plus ongoing costs. This may sound expensive, but you’re buying a whole business. A license agreement limits how you can utilize trademarks. A license is cheaper and simpler, but provides you with less access.
Due to the cost difference, company owners occasionally choose licensing agreements over franchising agreements. However, these are not interchangeable and don’t work for the same sorts of businesses. By signing a licensing agreement for franchising-type company activities, you place yourself in legal danger. If start-up fees are limiting you from starting a franchise, consider low-cost solutions or seek franchise finance.
Licensing – Pros
Licenses provide the licensee flexibility. A licensing arrangement often involves two well-established companies. The licensee buys the right to utilize protected marks that are already popular. This makes licensing a safe investment that may grow your business.
Another pro of licenses over franchises is the simplicity of the agreement. The licensing agreement will be relatively easy to understand because it only pertains to the use of one (or a small number of) protected marks.
Licensing – Cons
The limitations are the main cons of licensing over franchising. A license only allows for the use of particular protected marks. Although this limits the arrangement, your business may not require anything more. It’s also crucial to make sure you’ve taken precautions to safeguard your intellectual property before signing a license deal.
The issue that many people are unclear of their actual purpose is another disadvantage. There is a lot of misunderstanding on whether to establish a license agreement and when the licensing agreement crosses the line into a franchise. Before you sign either a license or a franchising agreement, it is important to consult with an experienced attorney.
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