The Major Difference Between Franchising and Licensing

I thought I would take a minute and answer a very common question often asked: “What is the difference between franchising and licensing.”

Licensing works best when a company has a product to distribute. When a business is under a license agreement, money is made as the Licensee continuously purchases product from the Licensor instead of receiving royalties. The license agreement model works best when there are products that tie the Licensee to the Licensor and there is no concern or standards set for how the Licensee’s business operates. For illustration, best examples I can think of are laundry mats, vending machine or pack/mail/shipping businesses.

Franchising is a regulated industry set out to protect the buyer (entrepreneur) and is considered a “safe harbor” when it comes to getting into business. In fact many states have certain requirements (far more stringent that federal requirements) when approving a franchisor to sell franchises in their state (more on that topic later). A franchise is a proven business model whereas the entrepreneur is in business for themselves, but not by themselves because the Franchisor is there to help, guide and assist them to grow (if executed properly). Licensing does not have such safeguards and is akin to a drinking water through a fire hose then left alone.

Bottom line is that if you intend to:

· Require that the business is operated under your trade name (using your name and marks);
· Collect a fee (such as a one-time fee or ongoing royalty fee);
· Provide marketing and operational support;
· Require that each business operate a certain way, following your systems and procedures; and
· Collect monthly reports indicating financial performance

Then your business model is a franchise.