Have you ever wondered about the difference between licensing a business and franchising a business? It’s a common question and while franchising and licensing do have some similarities, they also have some crucial differences that you need to understand before you can decide which direction you should take in your business career.
If you’re considering a franchise or licensing option, you need to think long term, keeping in mind the limitations of each chosen platform with the type of results you expect to receive in the future. Outlining a clear expectation of how you want to grow your business or entrepreneurial career will help you make the right decision for your needs.
Franchising Basics – As the franchisee you will be an extension of the parent company in terms of policies, branding and trademarks. You will be expected to learn a considerable amount about their policies and regulations and the franchise holder will have a say in, and control over some parts of your business. You will benefit from ongoing support and training from the Franchise. As a franchisee you will also receive geographical defined territory within your market area
Licensing Basics – The relationship between you and the parent company in a licensing agreement is less involved, the main difference is that licensees do not receive geographical exclusivity or territory rights and in return you will pay a much lower start up fee. You will receive less support in terms of training and won’t hold the rights to any trademarks, branding or policies, but in return you will have much more control over many more aspects of your business.
Franchising Fees – In terms of payments, as a franchisee you are usually required to pay start up costs at the beginning of the agreement as well as a ‘franchise fee’. The franchise fee is a monthly ongoing royalty fee on profits after expenses or generated revenue.
Licensing Fees – As a licensee you would not normally be paying any ongoing fees to the parent company, meaning that after your considerably lower start up costs you may not have any further financial obligations to the parent company.
Franchising Benefits – A business that is in a position to franchise has generally built a successful business model and will have considerable financial support, a well known brand, and marketing departments that can assist you in building a business for yourself with the benefit of not having to do it by yourself.
Licensing Benefits – In contrast, a business that is licensing out likely doesn’t have as strong a brand presence and are looking for entrepreneurs to help build the brand and take it to the next level. As a licensee you will need to invest more of your own strengths and knowledge in order to be successful.
Both models have the potential for success and having some insight into your own personal goals will help you get a better idea of which business model will best suit your circumstances.