Franchising and Licensing, despite their similarities, are fundamentally different.

Which of these two business models best fits your requirements?

Read on to find out.

franchising vs licensing

Franchising vs Licensing – How to Choose?

Franchising vs Licensing is often the tough question potential would-be business owners ask themselves, as both are popular business models. Used by businesses across the world, these two models carry their own sets of advantages and shortfalls. However, many businesses – especially the nascent ones – fail to differentiate between the two, thus losing a valuable edge over their competitors.

We have already discussed in depth what franchising is and how it works. We have also taken a brief look at the terms that constitute licensing agreements. Before we discuss the differences between the two, it’s pertinent to define both the term, for the sake of clarity and reference.

What is Franchising?

Franchising is a business arrangement that allows one business (the franchisee) to make use of the brand, trademark, products, services and proven business strategies of another business (the franchisor) for a mutually agreeable fee and within the terms specified in the Franchise Agreement.

What is Licensing?

Licensing is a business relationship in which one business (the licensee) is legally allowed to generate, establish and expand their revenue streams using a product, service, technology or any other asset owned by another business (the licensor) for a fee, over a period of time.

Franchising vs Licensing – The Comparison

The notable points that separate franchising and licensing from each other are detailed below:

Control Over Assets and Operations

A franchise business may or may not own the assets acquired from the franchisor. Typically, the franchisor and the franchisee share the ownership of the inventory, while other assets are either financed by the franchisee via external funding or leased directly from the franchisor. Additionally, the franchisee is required to run the daily operations under the guidance and watch of the franchisor.

Such complicated control sharing doesn’t exist in licensing models. The licensee purchases the rights to the asset and is, then, free to use it the way they please, subject to reasonable stipulations.

Fees and Other Costs

Comparing the costs involved in running a franchise to those involved in maintaining a licensing agreement is rather unreasonable. This is mainly because of the natures of these costs. Franchising requires the franchisee to raise initial working capital to pay for the franchise fees, legal fees, setting-up costs and other incidental expenses. In addition, recurring costs such as the franchisor royalties, personnel salaries and operational costs need to be accounted for, as well.

As far as licensing is concerned, it only involves two cost components – a fixed initial fee to acquire the licence and recurring fees (on an annual basis, in most cases) to keep the licence.

Business Support

The extra costs involved with franchising are justified by the thorough and ongoing business support that franchisors offer. Since every franchise operates under the franchisor’s brand name, responsible franchisors make every effort to extend technical and operational support.

As far as licensing is concerned, the licensor has no legal responsibility towards the licensee. The support extended by the licensor is, hence, limited in scope.

Revenue

Franchise businesses are built to make the most of existing market demand for products and services. Franchisees don’t have to work towards creating or building the demand – the franchisor’s brand is what generates the revenue for them.

This advantage isn’t available for licensee businesses. Thus, licensees are forced to find ways to integrate the licence into their business processes in the best way they can.

Franchising vs Licensing – Summary

  Licensing Franchising
Ownership and Control Licensees enjoy greater control. Franchisors enjoy greater control.
Costs Involved
  • Licensing fees
  • Royalties (if applicable)
  • Franchise fees
  • Servicing charges
  • Initial working capital
  • Operational costs
  • Royalties (if applicable)
Income Based on the licensee’s business model Based on the franchisor’s business model and brand
Support Limited in scope Franchisors offer extensive support.