Licensing vs. Franchising: Everything You Need to Know
This is a question that a lot of business owners and aspiring entrepreneurs ask themselves as they try to figure out which business model may be best for them.4 min read
3. Which is Better?
Updated October 27, 2020:
What are the differences in licensing vs. franchising? This is a question that a lot of business owners and aspiring entrepreneurs ask themselves as they then try to figure out which business model may be best for them.
Generally, with a license agreement, some of the key points include:
- The licensee is being given permission to use the licensor’s trademarked logos and such on the goods they are selling.
- The licensee pays the licensor for the rights to that intellectual property.
A common example of this a sports team that provides licensing rights to a company like Russell or Champion to make things like hats and sweatshirts with that team’s logo.
In this business model, the licensor may dictate the ways in which their license is used, but they do not generally have any input regarding the day-to-day business operations of the licensee. Additionally, the licensor does not typically provide any additional support regarding marketing or advertising efforts and any support that is provided is only specific to anything regarding the license.
Licensing agreements are typically non-exclusive, meaning that the licensor may sell a license to multiple companies, just as the licensee may have the rights to several different licenses. For example, Alex & Ani jewelry, while creating Wonder Woman and Harry Potter bracelets do not exclusively own the rights to those licenses, nor does Champion only have the licensing rights to one sports team. With that said, to again use the Alex & Ani example, while they do not have exclusive rights to the Wonder Woman trademark, they may have an agreement with DC Comics that they will not create jewelry utilizing trademarks from the competing Marvel Comics. Those kinds of agreements are generally about as far as a licensor can go in having a say as to the business operations of the licensee.
If you are a licensor, before you sell the licenses to your intellectual property, you will want to consult with an attorney to ensure that all contracts are drafted in such a way that your trademarks are being fully protected.
This business model provides an opportunity for an aspiring business owner to take part in owning part of an already established brand. Benefits may include:
- While generally more costly than a licensing agreement, a franchise allows the franchisee to receive ongoing support, such as training, marketing materials and advertising, from the franchisor. This support is not free necessarily, however, as franchise owners are expected to pay a certain percentage of their profits back to the franchisor.
- The franchisor often helps ensure at least a certain level of success for their franchisees by not allowing multiple franchises to be open in the same areas, etc.
The franchise business model does not, however, provide the same level of autonomy as a licensing agreement. In a franchise, the franchisor is involved with the day-to-day business operations of their franchises, such as personnel policies, accounting practices, as well as the goods and services that can be provided by the franchise.
Which is Better?
If you are a licensor, your primary concern is ensuring that your intellectual property is being used properly, beyond that, you have very little control. As a franchisor, you maintain a lot of control over your brand. So, in terms of which one is better, it is really going to come down to how much control you wish to have. Additionally, you will want to take a look at how you wish to expand: with licensing, you are able to expand into other markets and companies, without having to worry about new physical locations, whereas with franchising, the growth comes with new brick-and-mortar locations. Take a look at your capacity and how you desire to grow, in determining if licensing or franchising is the best move for you.
If you are on the other side of the table, and debating whether or not you want to enter into a license agreement or buy into a franchise, you will also want to take a look at what level of control or autonomy you want to have. Will you need marketing and training support, or are you wanting to expand your business by being able to provide additional goods? Do you want to spend the capital required to buy into a franchise?
Either scenario can be a great way for a business to expand, depending upon each party’s wants and needs.
If you need help with licensing vs. franchising, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.