Understanding the Difference Between Franchising and Licensing

Franchising and licensing could be wonderful tools that will affect ownership and control of your business and how your brand can grow. While they can appear similar on the surface, clarifying the distinction between them matters. To understand the difference between licensing and franchising, let’s break down what each term means.

Franchising

Franchising is a business expansion strategy and is a way for a successful business to achieve growth by allowing the rights to operate the same business model and sell the same products and services to a franchise with the skills and expertise necessary to do so. There aren’t many limits on the types of businesses you can franchise; but when this occurs, the owner remains in control of the brand and the licenses (licenses grant permission to the franchise to operate).

In exchange for these permissions, the franchise will put up the initial capital to get the business started by paying a license fee. The license fee covers the passing down of expertise and the business model, training, and marketing, as well as other skills and resources. In this way, a franchise includes licensing, as the business owner is licensing the intellectual property of their business to the franchise and permits them to use branding, logos, and trademarks.

However, it is essential to note that the formalities in setting up a franchise and the level of control that the franchisor has is what sets it apart from a standard licensing agreement. The franchisor should retain control over the running of the business, the future of the company, and any changes they wish to make. This means that the brand cannot be damaged by the franchise going in a different direction by providing alternative products or services. Strict quality control is put in place to ensure that the franchises all operate in the same way.

Licensing

A licensing agreement still allows the business owner to retain ownership of its intellectual property, but also permits others to use it as well. However, the terms of licensing agreements tend to be more flexible and can vary significantly depending on the individuals. Most licensing agreements combine the “know-how” and the actual products and services themselves. However other licensing agreements are merely giving the buyer the right to use a particular product only. An example would be when a person buys a software license – they buy the right to use the software, but are not able to amend it in any way.

An owner may also wish to grow their business by issuing licenses to third parties to move their business in different directions. A successful fashion retailer may decide to launch a hair products line and therefore grant a license to a manufacturer in that industry, while still releasing the products under their original brand name. Alternatively, a successful brand may get a third party to sell products under their name. A common example is when celebrities release clothing lines that are then sold through big-name retailers.

Licensing is less expensive than franchising, so it is usually a more appealing option for smaller businesses or can be an excellent first step for those who wish to end up franchising their business, but don’t want to dive straight in.

Either way, protecting your brand is essential. So whether entering into a franchising or licensing agreement, it is vital that the terms and conditions are carefully considered. An experienced business attorney can ensure that you safeguard your brand and can help advise you on the terms and conditions that should be in place before going ahead. If you would like to discuss how to protect your brand, schedule your free consultation with John Espinosa, Esq today!

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John Espinosa, Esq.

John Espinosa helps entrepreneurs do business right by providing convenient access to quality legal advice and services, with more than 15 years experience in the legal field from multiple perspectives.

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