Over the last few decades, franchising and licensing have become common expansion strategies for many business owners.
If you are reading this, chances are you’re an entrepreneur seeking to make more money, have multiple streams of income, retire early or leave a legacy for your family. Both franchising and licensing can help you get there.
What's the Difference Between Franchising and Licensing?
A franchise is an extension of an already existing brand or business that wants to expand. It is an asset of your brand governed by the federal securities law.
When you purchase a franchise, you pay fees for the right to operate a business, participate in a standard operating system, and use the brand name and proprietary information of the franchise. The diversity of products and services offered by franchised businesses makes the option appealing to many aspiring entrepreneurs or business owners looking to scale and expand their businesses. McDonald's is one of the most famous examples of a substantial franchise business. From extremely modest beginnings, McDonald’s now has more than 36,000 restaurants in more than 100 countries.
Another fundamental difference between franchising and licensing is the amount of control a franchisor holds over the franchisee. When you franchise your brand or business, you retain an enormous amount of power. You supply the business model, and you can define the territory in which any given franchisee can operate. When you license a business, you sell the rights to use your company's products and trademarks in exchange for some version of royalties, which are usually an agreed-on percentage of the licensee's sales. The licensor retains ownership of the goods or intellectual property involved.
Licensing a Business or Brand
Did you know that when you buy a pair of Calvin Klein underwear, it's not actually made by Calvin Klein? The only clothing that the Calvin Klein company manufactures itself is some of its women's lines. Every other Calvin Klein-branded garment you buy, including perfume and jeans as well as their famous underwear, are a result of a licensing agreement. The makers of these products have licensed the Calvin Klein name and logo to help sell their own products.
One of the most reputable businesses in the licensing world is Disney. The Disney Consumer Products Branch has licensed movie images and characters, including the famous Disney Princesses, to companies selling everything from home furnishings to personal care products, with plenty of apparel thrown into the mix, ranging from T-shirts and kids' pajamas to wedding dresses.
Disney's primary competitor, Warner Bros., also draws a significant amount of revenue from the IP it owns, with DC Comics providing massive toy and apparel licensing opportunities. Even the Wizarding World of Harry Potter, is the result of a licensing deal. Since Warner Bros. doesn't own any theme parks, it chose to license its theme park rights to Universal Studios to capitalize on the Harry Potter IP.
Another interesting licensing example comes from America’s sweetheart, the Girl Scouts. The Girl Scouts uses different cookie bakers around the country, but the organization then licenses its name and its cookie types for use in ice cream, cupcakes, even candles.
Franchising vs. Licensing: Advantages and Disadvantages
If you buy a franchise, you get all the advantages of remaining self-employed, but you mitigate the risks by being part of a proven business that typically has a customer base ready and waiting. You may also gain a monopoly within a particular territory, and your initial investment may be lower than starting a business on your own.
For franchisors, franchising allows them to expand their business for less investment than opening new locations themselves. Other advantages of franchising include the fact that you know what the business looks like when it's successful, and you can often take advantages of economies of scale in your relationships with vendors and suppliers.
The downside of franchising lies mainly in the loss of control you have as a business owner since the franchisor makes a lot of the decisions for you. Of course, some business owners consider this narrowing of control a relief and therefore an advantage. Also, the profits tend to be slightly lower than if you had your own business, because as a franchisee, you typically have to pay franchise fees to the franchisor.
Licensing and franchising share a few similar advantages. Licensees also enjoy lowered risk because they're usually entering the marketplace with a known quantity and a built-in customer base. However, they enjoy a lot more freedom than franchisees.
A license allows the licensee to use, make and sell an idea, design, name or logo for a fee. They are advantageous for licensors because they allow them to expand their business’ reach without having to invest in new locations and distribution networks.
Licensing and Franchising: Which One Is Right for You?
Your choice in the franchising vs. licensing debate rests purely on your desires and needs as a business owner. Ask yourself a few key questions to understand which type of business arrangement is most appropriate for you:
- Do you find the securities laws that cover franchises to be burdensome?
- Does the franchise you're considering have a proven record of success?
- Are you looking for an easier entry into business, with fewer requirements? If so, a licensing agreement is typically much easier to finalize than a franchise agreement.
- Do you prefer a greater degree of control in managing your business? If so, licensing is again the better choice. If you like having many elements of your business pre-planned for you, head in the franchise direction.
Every business has its potential challenges. As you consider the difference between franchising and licensing, add up the pros and cons of your situation, goals, personality, and products. Also, remember to take into account the resources you have available when making your decision.