When you are ready to expand, you may investigate both licensing and franchising as possible directions for business growth, but it can get confusing as to how these options differ. “Should I franchise my business or license my business?” We get this question often and it is critical to understand the differences.
Teach Them and Turn Them Loose: Licensing
First and foremost you want to think about the role of your prospective “operators” and really consider how you see them handling your business. Let’s say that you do NOT care what these operators call their business and you do NOT care how they run it. On top of that, let’s say you also do NOT intend to collect any type of ongoing monies from them. So, basically, you really just want to collect a one-time fee to train them so they can go off and “do it themselves”. In this scenario, licensing may be an option as you can simply give them license for the ability to use your name, but that really would be the extent of it.
So, to be clear, you could give these operators permission to use your name to run a business, but you cannot exercise any control over how they conduct business going forward. Bottom line is if you are simply interested in just training someone on how to do your business and from there turn them loose, the operator is on their own without any further help from you, then a licensing arrangement is your path.
Level of Control: Franchising
Let’s say you want everyone to operate your business under the same name and everyone MUST operate their business in a certain way. Because everyone MUST operate a certain way, you are now exercising a level of control (read more about Is Franchising for Control Freaks)! For example, if you require operators to use specific vendors or suppliers; use, offer or sell certain services and products; or perform services a specific way then that is considered control (good example of this is if you require operators to use your recipes or if you require operators to perform services in a certain order to ensure consistency). In addition, if you are going to provide these operators with any type of marketing or operational assistance, guidelines or ongoing support; intend to collect a upfront fee; and collect ongoing payments of more than $500 per year, then YES then by definition this is a franchise relationship (learn how Franchising is Not a Parent Child Relationship).
So a quick overview of a franchise relationship is: 1) the required use of your name; 2) operational and marketing support (marketing support could be simple as listing the business location on your website locations page; and 3) monies that you collect (i.e. upfront fee and ongoing royalties of more than $500 per year). All of these things indicate that what you want to roll out is a franchise.
What’s Right for You Depends on Your Goal
It is really about your end goal and in the long run what you want of the equation (take a look at What is Your End Game Franchising May Play a Role). The most confusing variable in the franchise equation is marketing and operational support. If you want to license your business and simply collect some sort of one-time fee, then go for it (although keep in mind you will be training your competition). However, if instead, you really want to brand your business, ensure consistency of how your services are performed and products are being sold and want to build a culture of like-minded operators, then franchising may be the best option (learn more about the Benefits of Franchising).
No doubt there is a fine line between licensing and franchising (learn more Major Differences Between Franchising and Licensing). We have seen hundreds of businesses attempt to license and fail because they exercise control. As a result these businesses fall under heavy scrutiny with both federal and state government officials resulting in hefty fines, litigation and in some cases bankruptcy because the arrangement they created is really a franchise relationship (read a horror story about Licensing Gone Wrong). When it comes to business expansion the last thing you want to do is upset governmental officials.
If you are not sure whether to license or franchise your business call us directly at 1-877-615-5177. We will be more than happy to answer ALL of your questions (also check out this article Expanding Your Business, What are Your Options).
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