When a business owner considers expanding, there are two major options available; licensing and franchising. Understanding the difference between these two business models is valuable as one decides how they will further develop their business. While licensing is a broad term that encapsulates franchising, there are several licensing agreements available to prospective firms.
Licensing a Brand Name
Licensing a brand name under a licensing agreement gives one the right to operate within or with a corporation/brand. Having a license to another entity’s intellectual property can be a good business move for some people, but it often comes with liabilities like royalties to the licensor.
Royalties may be negotiated depending on the agreement, but generally, a fee on the licensee will go to the licensor at a predetermined rate. These royalty agreements don’t just include monetary compensation, but they may even dictate how the license may be used.
Having a licensing agreement has limitations as well. For example, a company licensed to another one is generally not granted access to shared research. Also, licensing agreements rarely provide the training and support to help out the newly licensed business.
Ultimately licensing is a limited relationship with another business, meaning only the two partners can negotiate the rights to use certain trademarks or brands. These deals can last anywhere from 15 to 20 years. A well-established company with a good track record, and a proven business model, generally have an easier time acquiring a license. Business operations with know-how will forgo franchise fees for a licensing agreement.
Some of the most popular licensing agreements have been granted by companies like Disney. These agreements allow lesser-known companies to license Disney trademarks in their own deals, or Disney can license an agreement with manufacturers to produce official Disney products. While licensing may not be beneficial for all parties, it may be the right fit for some businesses.
Franchising Agreements
Franchises are a legal business agreement between two companies – the franchisee and the franchisor. The franchisor is the business’s original owner, while the franchisee is the newcomer looking to open a new separate business under the franchisor’s trademark, brand, or name.
In a franchise agreement, the franchisor sells the rights to their brand to the franchisee. The rights include services, intellectual property, products, and even equipment. In exchange for these benefits, the franchisee will pay a fee to the franchisor for using their brand and any other support they receive. However, most franchising agreements are standard, as in typically unnegotiable, but franchisees may request a custom agreement with the franchisor. Franchise lawyers can help negotiate a better franchise agreement between two companies.
Disclaimer: Franchising agreements sacrifice a significant degree of control over franchisee business operations. Aspects like your business name to the way you advertise to the public are all subject to scrutiny. Prospective franchisees should be aware of this trade-off before forming a franchise or licensing model.
One of the most iconic franchise businesses in America is McDonald‘s. McDonald’s franchises most of their restaurants, but this comes with stipulations almost every McDonald’s franchisee must follow. Some of the rules include buying from officially licensed McDonalds food providers only, using specific repair technicians, fryers, freezers, and even the restaurant’s look as a whole.
These stipulations are to protect the franchisor’s right to determine how the brand is used or portrayed. While the franchisor dominates control of the business, the franchisee is also responsible for paying for training and expertise.
Each franchise is subject to the various state laws determining franchising agreements, but franchises are also regulated by the Federal Trade Commission (FTC). The FTC enforces franchise law using the franchise rule. The great thing about the franchise relationship is that most of the royalties and fees are paid upfront, so it is not a recurring expense. However, depending on the agreement, franchise owners may be liable to buy branded equipment from the franchisor.
Although running a franchise is a harrowing ordeal, the benefits of having a more significant, more established business to license from can be better than starting from scratch. For example, the training given to franchise owners by the parent company is usually extensive. These agreements are also less binding. For instance, they typically begin with a five-year commitment period which can be extended in the future. Franchise owners also have the added benefit of partaking in research and ongoing support with the franchisor.
Closing
Your businesses can snowball with a new business model. Choosing between these two business models can be difficult; that’s why we’re here to help. Speak to our franchise consultants to determine your best option and which franchise is right for you.
