Licensing Agreement vs Franchise: Everything You Need to Know
Licensors and franchisors have different roles when it comes to license agreement vs. franchising agreement options.4 min read
Updated November 26, 2020:
Licensors and franchisors have different roles when it comes to licensing agreement vs. franchising agreement options.
Licensing vs. Franchising
When it comes to licensing agreements, the licensor gives the licensee the rights to sell goods, use patented technology, or use a brand name or trademark. In exchange, the licensor receives payments from the licensee. These licenses are typically non-exclusive so competing companies can serve the same market.
Franchise agreements, which you can usually complete in a week, let the franchisor access a business system as well as branding and products. Both agreements require the franchisee and licensee to make payments to the business that owns the brand or intellectual property. Pertaining to fees, you might have initial and ongoing franchise fees as well as upfront franchise fees and monthly management service fees.
Franchises reproduce formulas instead of offering new ideas. For instance, licensing is when a store sells products with sports logos on them. Before the merchandise with logos can be sold, you must obtain a license. The franchise owner issues the license but doesn't include rights to the franchise itself.
Also, franchisees use another company's business model and brand name to form an independent branch of the company. This gives the franchiser control over the operations but helps to brand and market.
According to the Federal Trade Commission, there are three parts to franchising:
- The franchisee's goods and services are sold under the franchiser's trademark.
- The franchiser makes the franchisee make a minimum payment of $500.
- The franchiser maintains control of the franchisee's operations.
If you buy a franchise, you should look at balance sheets and compare the information to similar franchises in the area. To sell a franchise, you should protect the intellectual property (IP) and create a work manual and maintenance program. If you sell a license, you should make sure the IP is protected by law and state what rights the licensee has.
On occasion, a licensing agreement can turn into unintentional or accidental franchising if the contracts are drafted incorrectly or if the licensor controls the licensee's business operations. If that occurs, the licensor needs to immediately comply with franchise laws or readjust the operations to avoid franchise laws.
Corporate franchising involves an organization that seeks successful franchise planning and operation. It has franchise disclosure-registration laws, which define how the business operates, and business opportunity laws, which describe regulations on how the business runs. The seller must make all paperwork available to the buyer before the sale and give the buyer enough time to peruse the documents.
Oftentimes disguised as licensing agreements, illegal franchise sales don't stipulate the rights to use specific logos or give customers goods and services available through a legally obtained franchise. Purchasing a license agreement may seem like a cheaper way of opening a franchise, but copycat stores are illegal. The license agreement doesn't give the right to claim a business as a franchise.
Benefits of Franchise Relationship
When you enter into a franchise, you receive benefits from the organization you're supporting. You have access to its customer base and products as well as a smaller risk of failure compared to opening your own independent studio. Also, it's easier for you to secure financing if you have the franchisor's backing.
Benefits of License Relationship
Licensing agreements are usually more flexible and are more collaborative. Licensors can answer questions, suggest opportunities, and warn you of complications. They do this while giving you the freedom to operate in your own studio with your clients.
What Is a License Agreement?
A license agreement is a written contract where the licensor gives a licensee the rights to use something. An IP license lets the licensee have rights to use a brand, trademark, logo, or other types of IP the licensor owns.
What Is a Franchise Agreement?
Similarly to a license agreement, a franchise agreement is a contract. The franchisor has more control over franchisees than a licensor does. However, franchise agreements have specific directions on how the franchise operates and have specifications on the type of marketing franchisees attempt.
Key Characteristics of a Franchise and a License
There are certain characteristics between a franchise and license:
- Marketing plans: Franchises have common marketing plans, while licensees determine their own marketing.
- Methods and systems: Franchisors dictate their own methods, while licensees can develop their own.
- Performance: Franchisors monitor performance, while licensees don't have criteria.
- Fees: Both pay fees, but licensors don't operate a marketing fund.
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