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Franchising vs. Licensing
For a company looking to expand, franchising and licensing are often
appealing business models. In a franchising model, the franchisee uses
another firm's successful business model and brand name to operate what is
effectively an independent branch of the company. The franchiser maintains a
considerable degree of control over the operations and processes used by
the franchisee, but also helps with things like branding and marketing support
that aid the franchise. The franchiser also typically ensures that branches do
not cannibalize each other's revenues.
Under a licensing model, a company sells licenses to other (typically smaller)
companies to use intellectual property (IP), brand, design or business
programs. These licenses are usually nonexclusive, which means they can
be sold to multiple competing companies serving the same market. In this
arrangement, the licensing company may exercise control over how its IP is
used but does not control the business operations of the licensee.
Both models require that the franchisee/lincensee make payments to the
original business that owns the brand or intellectual property. There are laws
that govern the franchising model and define what constitutes franchising; some
agreements end up being legally viewed as franchising even if they were
originally drawn up as licensing agreements.
Comparison chart
Differences — Similarities —
Franchising Licensing
Governed by Securities law Contract law
Contents: Franchising vs Licensing
1 Definition 4.1 Legal implications
2 Arrangements 5 Examples
3 Advantages 6 References
4 Things to Consider
Definition
The FTC (Federal Trade Commission) definition of
franchising consists of three "legs":
1. The Franchisee’s goods and/or services are to
be offered and sold under the trademark of the
Franchiser First McDonalds franchise opened
2. The Franchiser requires the franchisee to make by Ray Kroc on April 16, 1955. This
was the Ninth McDonald's DriveIn in
a minimum payment of $500 or more, and
the U.S.
3. The Franchiser maintains significant control of,
or provides significant assistance to, the franchisee’s operation methods.
The definition is important because franchises are covered by securities law while
licenses are covered by contract law. Some licensing agreements may end up actually
creating unintentional franchises.
A license simply provides an individual or company with the right to use licensed
material or to do something that would otherwise be considered illegal. This is
particularly common with intellectual property.
Arrangements
A typical franchise includes rights to Trade Mark, trade names, logos, patents, trade
secrets and knowhow of a business. It includes a license to use the business system,
an obligation to share developments and improvements, and the right for the franchisor
to determine how the business operates. These can be divided into the “common name
leg,” which gives trademark permission, the “fee leg,” stating how much must be paid to
begin operations, and the “operations and marketing leg.” All internal systems must be
standardized inside the franchise. They take longer and cost more to set up than
licenses.
A licensing agreement can be completed in a week.
Advantages
Owning a franchise allows an individual to be selfemployed while also investing in a
proven system with training and support. It brings a readymade customer base and
often comes with client listings. There is a reduced risk of failure, ongoing research
and develop, and a semimonopoly in a certain territory. For franchisors, franchising
Income Revenue
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allows them to expand their business for less investment than opening new locations
themselves.
A license allows the licensee to use, make and sell an idea, design, name or logo for a
fee. They are advantageous for licensors because they allow them to expand their
business’ reach without having to invest in new locations and distribution networks.
Things to Consider
When buying a franchise, a businessman should look at balance sheets and bottom
lines and compare it to similar franchises in similar areas. They should perform a
namebrand availability search and investigate Intellectual Property issues such as
patent ownership.
Anyone selling a franchise should be sure to protect their Intellectual Property and
create comprehensive work manuals and maintenance programs.
Anyone selling a license should ensure that their Intellectual Property is protected by
law and specify what rights it grants the licensee.
Legal implications
Franchising is covered by securities law because the franchiser controls how the
franchisee conducts business. Therefore the franchiser controls whether or not the
franchisee makes money. So the government requires franchises to be registered and
for franchisers to disclose all risks to potential franchisees.
Unintentional franchises
A licensing arrangement can "slip into" an unintentional franchising structure if the
licensing contracts are drafted poorly or if the licensor inappropriately controls the
business operations of the licensee. In such a situation, the licensor needs to either (a.)
immediately comply with franchise laws, or (b.) readjust the operations to comply with
licensing laws and avoid franchise laws.
Examples
Examples of franchises include McDonalds, Subway, 711 and Dunkin Donuts.
Examples of licenses include a company using the design of a popular character, e.g.
Mickey Mouse, on their products. Another example would be a clothing manufacturer
like Life is Good licensing its designs and brand in a certain country to a local company.
It can also apply to the use of software, e.g. a company using Microsoft Office on its
computers.
References
Licensing and franchising EU Centre for the Promotion of Imports from developing countries
Franchising & Licensing What are they? and how can you benefit from them? World
Intellectual Property Organization
Franchising Wikipedia
Licensing Wikipedia
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Comments: Franchising vs Licensing
17 Comments Income
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Moses Benyawoh
thanks for the know ledge
Like · Reply · Jan 22, 2017 7:43pm
Stacy Burchard · UCLA
Great article. I thoroughly enjoyed reading it. I'm looking for some direction to start
promoting my business online. I had a quick small business question. has anyone
here gotten an "Oddit" from Odditly (google it). I heard about them from a friend
and said that they help guide you with dynamic audits to any product or service.
any thought would be great!
Like · Reply · 1 · Sep 1, 2016 2:03am
Yunjung Kim · Haeundae High School
Thank you!
Like · Reply · Apr 5, 2016 11:09pm
Zaheer Ahmed · Personal Banker at Meezan Bank Limited
Goood
Like · Reply · Jan 28, 2016 1:03am
Jůbĺėțh Mėçķý Śhįŕįmå
thanks
Like · Reply · Mar 12, 2015 2:18am
Khushi Tarrar · Gujranwala, Pakistan
Good information
Like · Reply · 1 · Feb 2, 2015 4:49am
Ram Bhardwaj · Barkatullah University, Bhopal
Useful material thanks.
Like · Reply · 1 · Sep 12, 2014 6:48pm
Uzzal Das · Works at Student
good answer
Like · Reply · 1 · Apr 15, 2014 2:18am
John Bodensiek · William Penn High School (Philadelphia)
To the pint. Thanks.
Like · Reply · Mar 4, 2014 3:41am
Smriti Dixit Shukla · Mumbai, India
Brilliant Information!!
Like · Reply · Feb 10, 2014 1:40am
Nyamukong Victor · National polytechnic Bambui
i need full definition and explanation
Like · Reply · 1 · Feb 6, 2014 6:11am
Joel A. Adekambi · Pentecost University College
knowledge
Like · Reply · Jan 2, 2014 3:29am
Channsoksay Rim · Rttc
it is made me understand clearly about these.
Thanks for yr help
Like · Reply · Dec 9, 2013 4:43am
Zaina Nakabuye · Kampala, Uganda
Thanks for ur efforts
Like · Reply · 1 · Sep 25, 2013 2:12am
Mohammed Anis · Accounts Officer & DDO at VAT Online Project, NBR
very helpful.
Like · Reply · Sep 17, 2013 1:12am
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December 8, 2013, 6:24am Compare Anything ›› Income vs. Revenue GO
very easy to understand and helpful quality material.. thanks for your
efforts.
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