Franchisee vs Licensee: Everything You Need to Know
Being a franchisee vs licensee with an established company defines the rights you have purchased from an established company.3 min read
Being a franchisee vs licensee with an established company defines the rights you have purchased from an established company. Depending on the type of agreement, the established company may have predetermined standards for how your business should run and how it should represent its brand.
What Is a Franchisee?
Franchisees run their own businesses but have purchased the rights to use an established company's:
- Business model
- Brand names.
Typically, there are extensive obligations in a franchise agreement, such as the products and services the franchisee can offer. As a result, there is usually a close relationship between the franchisor and franchisee. Some examples of franchise opportunities are Domino's Pizza, Jiffy Lube, and 7-Eleven. Additional examples can be found on the International Franchise Association's website.
Advantages of Franchising
Some advantages of starting a franchise include:
- Owning your own business while getting support from an already proven company.
- Most franchises have higher success rates than independent businesses because they are utilizing an established brand.
- Franchisors typically train you on how to run a business using their established business model.
- By offering exclusive territory rights, franchisors ensure franchisees aren't competing with one another.
Disadvantages of Franchising
Some disadvantages of starting a franchise include:
- Franchisees must comply with the franchisor's franchising code of conduct, disclosure requirements, rules, and franchise agreement.
- Franchisees must attend and pay for any training the franchisor requires.
- Franchisees must pay ongoing fees for the duration of the franchise business and group marketing fund.
- Franchisees lack flexibility on how to run their business.
What Does a Franchise Agreement Cover?
Franchise agreements are usually more complex than license agreements and are subject to stricter regulations.
- A right to conduct business in accordance with the franchise's business model, trademarks, and branding.
- Restrictions on operating the franchise within a specified territory.
- A list of supplies the franchisee must purchase from either the franchisor or its designated suppliers.
- The terms of the franchise agreement, including any rights of renewal and conditions that must be met for renewal.
- Any cancellation terms, including any conditions that allow the franchisee to cancel the agreement.
- The terms that allow the franchisor to terminate the agreement. As part of the termination, the franchisor usually has the right to purchase the franchisee's business assets and take over any lease agreements.
- Any resale terms, including any conditions that must be met to sell the franchise and any transfer fees that must be paid.
What Is a Licensee?
Licensees have purchased the rights to use an established company's tangible properties, such as products, names, trademarks, or logos. However, unlike a franchise, the licensor doesn't have any input into how a licensee conducts its business or establishes its own brand. An example of a licensing agreement is a professional sports team granting a business the right to create and sell goods using the team's logo.
Advantages of Licensing
Some advantages of product licensing include:
- Licensees aren't subject to disclosure requirements but must comply with any contract laws.
- Licensees have greater flexibility in supplying products or services but must take care not to damage the licensor's reputation with those products or services.
- Licensees have greater flexibility in how they run their business because there is minimal input from the licensor.
- Licensees can sell licensed products or services alongside any other products or services they have.
Disadvantages of Licensing
Some disadvantages of product licensing include:
- Licensees aren't given any support on advertising or the operation of their business,
- Licensees aren't granted any exclusive territories in which to operate their business.
- Licensors aren't required to provide training or support to their licensees.
What Does a License Agreement Cover?
Licenses agreements typically aren't as complex as franchising agreements and cover the following:
- Identification of any licensed properties, which lets both parties know what is being licensed.
- The terms of the license agreement, including the length of time the licensee can use the licensed property.
- Any fees the licensee is required to pay the licensor, including any ongoing royalties.
- Any restrictions placed on the licensee on what they can do with the licensed property. This is usually included to prevent licensees from using a property in a way that might damage the licensor's reputation.
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