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What’s Best? Franchising Versus Licensing

There are plenty of options open to the person who is starting a new business. Many people decide that when they start a new business they do not want to enter the business world without the advantage of a name that people know – franchising and licensing are two business options that people can use in order to start out with a popular brand and have a better chance of making strong sales in the beginning, establishing a popular business, and having a relatively high level of continuing business as the company grows. Franchising and licensing are very different things, however. Each offers different levels of involvement from the company you acquire the franchise or license from. There are up sides and down sides to each possible method of starting a company, so let us look at a few of them and get a sense of what is involved in each.

First of all, what are the basic differences between franchising and licensing? By definition, the modern franchise is a business model which creates an ongoing relationship between the franchisee and the franchisor – the franchisee will pay a franchise fee, and in return for this fee the franchisee will receive a wide variety of ongoing types of help from the franchisor company. The company which runs the franchise will grant the franchisee the use of the popular brand name and also provide the franchisee with supplies, materials for developing the storefront and interior of the location, assistance in choosing the specific location and sometimes in negotiating the terms of the lease, assistance in negotiating a loan with the local bank for the start-up costs and ongoing costs, and general assistance as far as methods, training materials, advertising, marketing and so on.

A licensing agreement is a much more simple business agreement, wherein one company pays another for the use of an idea, name, logo or design aesthetic. The fee may be a one-off or ongoing, and it will give the buyer the privilege of using the trademark or copyrighted materials on their goods or services. There will usually be stipulations which allow the owner of the trademark / copyright design to withdraw permission to use it depending on the success or otherwise of the business. There will usually be no other support from the company selling the trademark – the business agreement will be limited to the right to use the licensed property.

The pluses and minuses of a franchise business depend on whether you are thinking of creating a franchise location from someone else’s existing business, or whether you are thinking of turning your own business into a franchise. For the franchisor, the advantages of creating a franchise are that the franchisor has the ability to exert a large amount of control over how their image is developed – the actions of the franchisee can be controlled to a large extent through the franchising agreement, leading to a greater sense of consistency from location to location and making it easier for the franchisor to see to it that the new locations are successful – this in turn adds to the value of their brand.

Another plus for the franchisor is the profits they are able to make from the stipulations in their contract requiring the franchisees to buy their working supplies, equipment, etc. from the franchisor. By carefully determining the prices for the supplies the franchisor can make a consistent profit, not only from the franchise fees but also from the monthly sales of the things that the franchisees need to keep their businesses running.

Minuses for the franchisors are that the business of running a franchise company is very different from that of running a single business – making the transition from a small business to a franchise involves setting up a section of the company that is involved entirely in selling the franchise materials, performing legal duties, collecting franchise fees, dealing with questions and negotiations with the franchisees, etc. All of these are ongoing tasks which the franchisor must be ready to manage and which have little to do with the normal operation of a single store. The franchisor company is running a very different kind of business demanding different skills and the previous experience the business manager has might not apply (i.e. a successful business does not necessarily translate into a successful franchise chain).

When the owners of a company want to franchise their existing business, they usually create a new company to take care of all of the franchising tasks; this helps to keep the functions separate and ensure that the success of the one does not hinge on the success of the other.

For the franchisee, the upsides of the franchising arrangement are the extra help that they receive selecting their equipment, business processes, location and so on, and the knowledge that the business model that they are using is one which has been tested and proven to work. This and of course the advantage of going into business with a name which is already recognized by customers enabling them to start making sales right away. When a new business owner wants to create a successful and easy to run business, a franchise will often be seen as the answer, providing all of the training assistance and information which the entrepreneur needs.

The down sides of the franchising arrangement for the franchisee are usually based around the control over the business – the franchisor will generally dictate, or at least have a large say, in many of the decisions about how the business is run and marketed. This is fine as long as the decisions made by the franchisor corporation are in line with what is best for the franchisee; however in some cases the franchisor will seem to not understand the local situation and to enforce decisions which do not make sense – at times such as this there may be disputes between the franchisee and franchisor and the franchisee may be without much legal recourse, bound as they are by the terms of the franchise agreement.

A licensing agreement has its own pluses and minuses – for the licensor the pluses are that the licensing agreement is nearly all profit. There is rarely any necessity for the licensor of the intellectual property to create another company to take care of the legal needs of other companies using their trademarks. The down side, of course, is that if the companies using the trademarked designs of the original company do not provide good service or products it will reflect poorly on the original company – therefore the agreement will usually include clauses which make it possible for the licensor to withdraw the rights to its designs if it sees that there is some reason that they no longer want it to be used. There may not even have to be any kind of extenuating circumstances; the licensor may reserve the right to end the contract at any point to make it easier for them to protect their marketing image.

The up side for the licensee is the image that they are able to acquire, while the down side is that they do not receive any help in figuring out how best to use the licensed images or designs; there is usually no agreement for the sharing of business data and the company which is licensing the designs will have to try to work out the best way to use their purchase on their own. If the licensor company provides extra help to the licensee, the local laws may try to redefine the business relationship between the two companies as a franchisor / franchisee relationship, so the licensor may actually have to specifically define and restrict its assistance in accordance with the advice of their lawyers – whenever you are entering a situation that involves intellectual property rights the advice of legal counsel is imperative.

Both franchising and licensing can provide aid to companies which want to improve the sales and performance of their businesses. These routes allow a company to make additional money by helping other companies replicate their success and allow a company to gain the benefit of additional customers and attention as a result of brands and products which people recognize. Whether you are planning to start your own new business, or just looking for a way to increase your profits and expand from the business that you have already established, an understanding of the differences between franchising and licensing will help you find a way to meet your business goals and reap the rewards. Good luck using franchising and / or licensing to improve the way that you do business – no matter what kind of business your company is engaged in!

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