What’s the Difference Between Franchising and (Brand) Licensing? (And How to Choose What’s Right For You.)

Business development and growth can be achieved through franchising or brand licensing. As both routes allow you to expand your business while handing over much of the responsibility and cost to a third party, there’s a lot of confusion surrounding the difference between franchising and brand licensing. Today we aim to clear the ambiguity once and for all.

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Now we explore two of the most popular business growth strategies. By analysing the pros and cons of each, you should be able to make a more informed decision as to what steps to take next. By the end of this article, you should feel confident with the difference between franchising and licensing and which is better for your business.

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Franchising vs licensing

What is the definition of licensing?

The licensee will pay the licensor for the right to operate under the business’ name and utilise its brand image and intellectual property. But, unlike franchising, the licensee does not have to replicate the licensor's business model.

In fact, licensing is often used to expand a business into new consumer markets in which the licensor has no experience or expertise. The licensor (IP rights owner) retains ownership of its IP (intellectual property), while granting the licensee the right to use it in exchange for monetary value.

What is the definition of a franchise?

Franchising is a type of business model that involves the owner of a company – the franchisor – expanding operations by signing agreements with other individuals, known as franchisees. The agreements allow a franchisee to manage their own business, though it continues to operate under the franchise’s name and brand. The franchisor benefits by charging a franchise fee and taking a cut of each franchisee’s turnover.

Essentially, the franchising system takes a successful business model and replicates it over and over again in different markets, the exclusive rights to which are granted to a franchisee. This is important to note, as a defining feature of franchising is the fact that the business model is replicated in exactly the same way each time a new franchise unit is opened.

Where does this leave business owners?

Licensing tends to be better suited to business owners who want to benefit financially from a brand’s reputation and licensors who are willing to let licensees utilise their image in a number of different ways. Also, it tends not to be as expensive as franchising, so is a good way to start growth if you don’t want to go through all of the formalities.

Franchising is orientated towards business owners who have a specific business plan that they want to replicate in different markets. If you want to build a valuable consumer brand, franchising is a much better idea than licensing.

It’s also better if you want more control over your business and if you want the security of franchisees following your business model and participating in your training programmes. You can read more about whether you should franchise your business here.

What kind of business licenses exist?

The licensor might grant the right to use trademarks for branding products and services, patents for technology, registered product designs, copyright for literature or confidential information. To understand how this looks in the real world, let’s consider some examples below.

• Let’s say a car wash company has developed a process for getting customers to choose hot wax or other additional services that proves incredibly successful. It might license the process to another company in return for royalty payments. In this case, the IP is the’ know-how’.
• Licensing can also be applied to the use of software; for instance, when a company uses Microsoft Office on its computers. In this case, the company only owns the right to use it, nothing more. The software is licensed to users under strict terms and conditions.

The following two are examples of brand licensing:

• The perfume industry is one area in which licensing is very much apparent. Calvin Klein doesn't actually make its perfume. It has simply sold the licence to its brand to an experienced perfume house.
• Similarly, Disney doesn't manufacture all of its merchandise itself but instead sells the licences to its films to toy makers.

What kind of franchises exist?

Examples of successful franchises can be found everywhere around us. They can be split into five main types:

• Business-to-business (B2B) franchises. This type of franchisee will negotiate the provision of products/services to other businesses. An example of this on our network is ActionCOACH, which provides management training to professionals across the UK.
• Investment franchises. These require significant investment and the franchisee will take a managerial role rather than work in the business directly; for instance, managing a large team of employees at a hotel.
• Retail franchises. This type is generally operated from a retail outlet. An established brand will gain revenue from customers walking in and purchasing directly. We have a large portfolio of retail franchises; one of them is clothes franchise Noa Noa.
• Management franchises. These are run from regional head offices and involve the management and development of a group of operatives for the product or service – for instance, van-based businesses like ChipsAway.
• Single operator franchises. This is where a single operator sells products or provides a service in a specific industry. This type is suitable for home-based businesses, such as Techclean, and smaller start-up businesses.

Advantages of licensing

There are four main pros of licensing:

• Licensing is a growing business strategy. In 2017, the revenue generated from the global trademark licensing sector grew by 3.3 percent to equal $271 (£205) billion, according to the International Licensing Industry Merchandisers’ Association’s (LIMA) Annual Global Licensing Industry Survey.
• Licensing is a good option when licensees want the freedom to run the business in any way they deem fit. If they don’t want a franchisor providing them with the business model blueprints and they feel that they could make a greater success of it on their own, licensing is the way forward.
• It’s also true that licensing agreements are generally cheaper than franchising agreements.
• Licensors can expand their business without having to invest in new locations and distribution networks.

Disadvantages of licensing

Despite there being greater freedom for licensees to run a licenced business in any way they think suitable, there are some standards to maintain:

• Most brand licensing agreements will include clauses that stipulate that the licensee cannot compromise the brand’s reputation. They will also state that all products and services offered in its name must reach or exceed certain standards. If not, the licensor is permitted to revoke the licence.
• In terms of disadvantages to the licensor, there’s the obvious issue of monitoring how your brand name, image and intellectual property are used. With licensing, you are essentially selling your reputation. Consequently, its value needs to be maintained and nothing can be allowed to damage it.
• Licensors lose partial or full control of the intervention and rely on the licensee’s ability to commercialise the business effectively. Therefore, poor strategy or execution risk damaging the business’ success and the brand’s reputation.

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Advantages of franchising

Franchising is beneficial to the franchisor in a number of ways.

• First and foremost, they receive a lump sum when each franchisee signs up and then take a percentage of each unit’s turnover going forward.
• It also allows them to expand their business at a much faster rate.
• Franchising benefits the franchisee by allowing them to trade under an established brand name.
• They are also provided with access to a proven business model that can be quickly and easily replicated in a new market. This means that they don’t have to spend valuable resources on building their business’ reputation or attracting customers. Nor do they have to come up with their own business plan. It’s all pre-prepared.

Disadvantages of franchising

While there are many pros, there are some cons to choosing the franchise model:

• Franchising can be expensive for the franchisor at first. Preparing your business for franchising takes time and a great deal of money, so franchisors must be prepared.
• Pilot schemes need to be organised, due diligence carried out and marketing and sales strategies developed. There’s also no guarantee that franchising your business will lead to long-term financial success. Like any business venture, there are risks.
• For the franchisee, there are a number of disadvantages to the system. First and foremost, a new franchise requires a great deal of investment.
• There isn’t a great deal of freedom in the franchise system. As a franchisee, you’re expected to follow the franchisor’s business plan to the letter. However, for some individuals, this may be considered a benefit of the system.

How do you choose?

Now you have all the information you need to figure out your path forward. Based on your own goals and objectives, both franchising and licensing offer distinct benefits. They are both great ways to expand your business, but they differ greatly in terms of how much control you can have and how easy they are to manage. To read more about the pros and cons of franchising your business.