Which Is Better for Your Business? Franchising or Licensing?

14/08/2018 08:00 | Start a business

What is better - franchising or licencing?

Licensing and franchising are two similar business models that are distinguished from one another by a few important features. Here, we take a look at the definitions for both models, provide some examples, and explore the advantages and disadvantages of each.

What is franchising?

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 franchisees 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 is licensing?

Licensing facilitates business expansion in a slightly different manner. While the licensee will still pay the licensor for the right to operate under the business name and utilise its brand image and intellectual property, 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.

Examples of franchising and licensing

Examples of successful franchises can be found everywhere around us. The most obvious are fast food chains. McDonalds, Subway, Dominos, and Papa John's are all large franchise networks. Examples of licensing are a little more difficult to recognise. The perfume industry is one area in which licensing is very much apparent. Calvin Klein doesn't actually make their perfume; theyve simply sold the licence to their brand to an experienced perfume house. Similarly, Disney doesn't manufacture all of their merchandise themselves but sell the licences to their films to other toy makers.

Which is better for business?

The question of whether licensing or franchising is better for business is impossible to answer without greater insight into how the company operates. The success of both models depends on whether they are well suited to your specific business. Its impossible to say that either licensing or franchising is better without knowing what your goals are, how you see your business developing, and what type of business you want to run. Consequently, we need to look at the advantages and disadvantages associated with both the franchise business model and licensing to see how theyll affect your companys growth.

When is franchising a good option?

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.

When is licensing a good option?

Licensing is a good option when you require the freedom to run the business in any way you deem fit. If you dont want a franchisor providing you with the business model blueprints and feel that you could make a greater success of it on your own, licensing is the way forward. Its also true that licensing agreements are generally cheaper than franchising agreements.

What are the disadvantages of franchising?

For the franchisor, franchising can be expensive 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. Second, your future success is very much dependent on the quality of the franchisor. If they dont offer sufficient support or fulfil the commitments made in the franchise agreement, it will be difficult to grow your business in the right way. Finally, 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.

What are the disadvantages of licensing?

Despite there being greater freedom to run a licenced business in any way you deem fit, there are some standards to maintain. Most brand licensing agreements will include clauses that stipulate that the licensee cannot compromise or denigrate the brands reputation and 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 is used. With licensing, you are essentially selling your reputation. Consequently, its value needs to maintained and nothing can be allowed to damage it.

Conclusion
Both licensing and franchising are useful means for expanding your business. However, each model suits a different style of business. Franchising is orientated towards those that have a specific business plan that they want to replicate in different markets. Licensing is better suited to those who want to benefit financially from their brands reputation, but are willing to let the licensee utilise their image in a number of different ways.

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