What is Licensing and how does it works in the context of franchising?
Learn all about UK Licensing below and how it could work for you.
Licensing – An Age-Old Way of Maximising Asset Value
While franchising has gained significant traction in the UK over the course of last few decades, it is often compared to an older, more established business model – licensing.
Even though it’s quite common across a plethora of industries, it rarely gets a mention when it comes to small or medium sized businesses. This fact, however, is changing, thanks largely to the popular start-up culture. Since licensing and franchising are closely related, it is also quite common for them to be thought of as one and the same – a case far from being true.
Here we discuss what licensing is, how businesses utilise licensing deals to build on their assets and how licensing has taken shape as a formidable business model over the course of time.
What Is Licensing?
Licensing is the practice of legally allowing the use of assets – most commonly intellectual property rights – owned by one business to another. The business that owns the assets in question is termed as the ‘licensor’, while the business being allowed to use these assets is termed as the ‘licensee’.
This system is quite similar to that of franchising. As we discussed on our What is Franchising page, franchising is essentially a mutually beneficial business arrangement between the franchisor and the franchisee. Apart from this superficial likeness, there exist notable differences between these two business models. You can find a more detailed comparison between franchising and licensing on our Licensing vs Franchising page.
How Does Licensing Work?
Licensing works on the premise of value maximisation. A business that owns intellectual properties such as copyrights, patents and trademarks may decide to bring on board other businesses that are in a better position – typically in regard with resources – to make the most of such assets.
A licensing deal involves ‘renting’ of such intellectual properties to the licensee businesses. These businesses can then use these properties for a set period of time to earn profits.
Let’s consider the example of a pharmaceutical research business. The business has, at the conclusion of a lengthy research cycle, succeeded in securing the requisite approval for a certain modification in the manufacturing process of a generic drug. This modification, when employed on a large scale, can save the drug manufacturing businesses millions of pounds in operational costs. The research business, hence, licenses the said technology to the manufacturing companies for a fixed fee, along with a percentage of overall sales for a period of time.
Is Licensing Always Risk-Free for the Licensor?
It’s easy to assume that licensing involves little risk on the part of the licensor, as compared to franchising. There are, however, many downsides to licensing that franchisors may not always have to confront.
The most important among these is the maintenance of quality. If the licensor has a widespread industry presence and a formidable track record, they may not always find it easy to spot licensees who can match their repute. Keeping a continual watch over how their most valuable asset – their brand – is being used by third parties can thus prove to be much less profitable in the long run.
How Do Licensees Recoup Their Investments?
Like franchising, licensing involves using the market opportunities in order to secure a share of the market. The licensees can recoup their investments in licences in many ways:
- Adding efficiency to extant business operations
- Utilising the brand value of the licensor
- Growing nascent markets with futuristic licences
- Gaining an edge over the competitors
Should You Choose Licensing?
Licensing makes little sense for businesses that are light on resources, experience or share of the market. If you are starting out your business venture and need the support of a recognised brand name, it is a much better idea to go the franchising way, as it will require lesser investment of time, money and other resources on your part.
Do read through our collection of handy franchise resource guides to find answers to your questions.
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