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What is the Major Difference Between Franchising and Licensing?

September 14, 2009 by
What is the Major Difference Between Franchising and Licensing?

We would like to take a minute to answer a very common question often asked: “What is the difference between franchising and licensing?”

Bottom line is it boils down to control. It really depends on how much control you want to have over your operators. Traditionally a business owner (like you) wants everybody to operate under a common trade name with a level of control placed on each operator to direct how they run their business in an effort to ensure consistency (leading to branding) which equates to franchising.

Licensing

Licensing works best when a company does not have any desire to exert any type of control over its operators, wants to just teach someone how to do the business then walk away and maybe become a supplier for these operators. When a business is being offered as a license agreement, money is made by a one-time fee that is paid to you (maybe renewed once a year). You do not receive any ongoing payments (otherwise known as royalties) however operators could choose to buy products from you. The license agreement model works best when you do not want any ties to these operators (referred to as “Licensees”) and there is no concern or standards set for how these operators run their business. For example, you may fall under this category if you just simply want to teach someone how to setup a laundry mat business, vending machine business or maybe even a package, shipping and mailing business. The reason we point these examples out is because typically this is what we see when it comes to licensing, which is an unregulated industry.

Franchising

Franchising, however is a regulated industry to protect the consumer (in this case the entrepreneur) when buying a business. Franchising is typically considered a “safer” type of business for someone to purchase when they are looking to be in business for themselves. In fact many states have additional requirements (far more stringent than the federal franchising requirements) when approving a franchisor to sell franchises in their state (see our article on, “Franchise Registration: Some States are Tougher“). A franchise is seen as a proven business model and the entrepreneur learns from the business owner (you) and gets ongoing support from you so they can be self-sufficient. A franchisor’s role is to help, guide and continue to mentor franchise operators (now known as franchisees) not only when they open their business for operation but for the entire duration the franchisee is running their business.

Definition of Franchising

The bottom line is as a franchising company you are giving somebody the right to operate a business using your methods, techniques, trade secrets and of course your name in another geographic area and franchisees are required to adhere to the standards that you have created to preserve your namesake. If you:

  1. Require an operator to use your name;
  2. Provide any type of operational and marketing support (such as putting locations on your website, giving updated forms, providing advertising and marketing pieces, providing ongoing support, etc.);
  3. Collect an upfront fee; and
  4. Collect any type of ongoing fee of more than $500 per year (otherwise known as a royalty)

Then by definition this is a franchise relationship (read more about what is franchising).

A Simple Example to Illustrate the Differences

Another way to think about licensing is if you walk into an office supply store and you see an accounting program on the shelf and buy it. You walk up to the register and you pay a few hundred dollars. You get back to your office, download the program and typically you agree to the terms and conditions for the use of such accounting software (a license agreement).  The makers of this accounting software do NOT care how you use the program and has NO control over how you use the program nor are they responsible if you enter the wrong data into their program. Usually, the accounting program comes with instructions but if you want any type of ongoing support there is some type of additional fee for that. So let’s now apply this logic to your business. You could collect a one-time fee and hold a seminar or workshop to teach someone how to setup your type of business (and under certain circumstances you could even license them limited use of your name only, to use for their business which is risky, but possible). Then after the seminar or workshop is over the participants disappear, go back to their own city or state and are left to their own devices. In the meantime, you collected a fee for sharing your know-how and in reality you really trained your competition. In this example you have no desire to talk with these participants again, provide them any additional help as they operate their business and you really don’t care if they succeed or fail. Another term for this example is a “business opportunity”. And if this is appetizing to you then you should explore the idea of turning your business into a business opportunity and look into complying with all the different business opportunity laws in each state.

However in our experience most business owners, like yourself, want to grow their business with the intent of becoming a brand and the strong desire to help people not only get started into their business but continue to help them grow (to learn more about the benefits of franchising see our article on this topic). Most business owners (like you) don’t want a hands-off approach. They have spent too much time developing their business and their business is their baby. They don’t just want to let someone run wild with it, especially if their name is attached to it.

More than likely you have tons of questions about franchising your business and we encourage you to visit our website. You can also call us directly at 1-877-615-5177 and we will be more than happy to answer all of your questions and determine if franchising is the best path for expanding your business.


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