What Is Better: Licensing or Franchising Your Business?

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What is better - franchising or licensing?

There are different ways to help your business grow. Here we'll explore two in more depth to help you understand the pros and cons of each. Then you should be in a better position to make an informed decision as to what steps to take next. By the end of this article you should have established whether licensing or franchising is better for your business.

The ins and outs of licensing a business

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 kind of business licenses exist?

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

  • Lets 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.

The pros of licensing

There are four main pros of licensing:

  • Licensing is a good option when licensees want the freedom to run the business in any way they deem fit.
     
  • If they dont 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.
     
  • Its also true that licensing agreements are generally cheaper than franchising agreements.
     
  • For licensors, they can expand their business without having to invest in new locations and distribution networks.

The cons 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 brands 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, theres 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 licensees ability to commercialise the business effectively. Therefore, poor strategy or execution risk damaging the business success and the brands reputation.

When is licensing a better option?

Licensing is better suited to business owners who want to benefit financially from the brands reputation, but are willing to let the licensee 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 dont want to go through all of the formalities.

The ins and outs of franchising a business

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 franchises name and brand. The franchisor benefits by charging a franchise fee and taking a cut of each franchisees 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.

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, for instance Techclean, and smaller start-up businesses.

The pros 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 units 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 dont 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. Its all pre-prepared.

The cons 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. Theres 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.
     
  • Secondly, there isnt a great deal of freedom in the franchise system. As a franchisee, youre expected to follow the franchisors business plan to the letter. However, for some individuals, this may be considered a benefit of the system.

When is franchising a better option?

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.
Its 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.

Licensing or franchising both great ways to achieve growth

Now you have all the information you need to figure out your path forward. Remember, whether you choose licensing or franchising, 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. If youre still confused about the differences between the two models, you can read another one of our articles here.

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