What are the Key Differences Between Brand Licensing and Franchising?

28/03/2019 18:00 | Start a business

brand licensing franchising

Originally uploaded on 17/08/2017. Updated on 28/03/2019.

If your business is booming, then you may consider buying the rights to a brand that you think could make you even more money. But what if the licensors performance targets arent met? What if the business doesnt have the experience to market the licensed products properly? What if the complexity of running a licensed business is overwhelming? Youre not alone if youve had these concerns. Many small business owners come to the decision that its better to stay as they are.

Business development and growth can be achieved through franchising or brand licensing. Both routes allow you to expand your business while handing over much of the responsibility and cost to a third party, but theres a lot of confusion surrounding the difference between franchising and brand licensing. The terms are often used interchangeably, but usually one option is better suited to a particular business.

So, how do you decide? Lets start by understanding each term in more detail.

Franchising

Heres the definition of franchising according to the International Franchise Association:

Franchising is a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the licence to a third party for the conducting of a business under their marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), but also provide them with an operating system, brand and support.

Simply put, a franchise is a type of business that is owned and run by franchisees but is branded and managed by a larger company (the franchisor). Franchises are all around us and form a large part of the modern high street from Subway and McDonalds to The Body Shop and Mothercare. In short, we interact with franchises every day.

The three key elements of franchising are the licensing of the brand, the provision of a proven operating system and the support the franchisor gives the franchisee. As with a brand licensing agreement, the licensing aspect of franchising is key and gives franchisees the right to use the franchisors brand name and/or other intellectual property rights. However, the degree of control that the franchisor retains over the brand is greater than that held in a licensing agreement.

The level of support that the franchisee receives in a franchise agreement is also greater too. The franchisor will offer training, support, expertise and experience. The franchise model gives franchisees the ability to grow under a recognised brand and become part of a larger group of business owners. All of this, along with independently owning and managing a business, provides responsibility and intellectual stimulation for the franchisee.

Licensing

Licensing can be defined as the renting or leasing of an intangible asset. It is a process of creating and managing contracts between the owner of a brand and a company or individual who wants to use the brand in association with a product for an agreed period, within an agreed territory. Licensing is used by brand owners to extend a trademark or character onto products of a completely different nature. (Wikipedia, quoting from Steve Mantons 2005 book Integrated Intellectual Asset Management)

So, the definitions are similar, but how is licensing different to franchising? Well, as with franchising, brand licensing gives the licensees business the benefit of using the recognised brand and intellectual property of the licensor. The main difference is that the existing business format is not shared, and no support or training is offered unlike in a franchise relationship. Many business owners choose licensing over franchising because they would like to expand their business without the control and restrictions that franchisors can put in place.

Becoming a Licensee

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 Associations (LIMA) Annual Global Licensing Industry Survey.

Its a common misconception that its difficult for smaller businesses to contact brand owners to discuss licences. Its true that you need to be prepared to put in the groundwork if you intend to approach a global giant such as Disney. Any brand owner will want to know what your target customers look like, if you have positive licensing experience and what marketing support you can offer if you are given the brand licence. If you can make sure you have all the relevant statistics and information to hand, youll be much better placed to impress the brand owners.

You can find out more about licensing by attending exhibitions such as Brand Licensing Europe. This particular event is your once-a-year opportunity to discover what trends are up-and coming, network with the industry and build partnerships with leading brand owners that will help to drive your business forward. Taking a different approach, you could use LIMAs online directory to access a comprehensive list of licensing agents, licensors and licensees and build up your professional network.

Costs

Like with franchising, an upfront fee and ongoing royalties must be paid to the brand owner. It is difficult to pinpoint the average price of a licence, as this depends on the brand, but costs and fees are generally lower than those incurred by a franchise agreement. The final figure of royalties that are paid is calculated by multiplying the agreed royalty rate by net sales.

Conclusion

In summary, there are many advantages to licensing. Licensed businesses are usually easier to manage than franchised ones, and the licensee gets more freedom to run the business in their own way. However, entrepreneurs should carefully consider their ambitions and ensure that they match up with their chosen path. Before entering into a licensing agreement, prospective licensees should be sure to carry out thorough research through multiple platforms before making an informed decision.

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