Difference Between Licensing and Franchising

Today’s topic will take us through two jargons used in the corporate world, giving us insight into the how models are used. If you plan to launch your company, you will have to deal with lots of hitches. Typically, you will have to deal with how to source capital, qualified people, breaking into your market, and a host of other things.

You see, you may have all of these hurdles figured out, but competing against the known products is not a child’s play. Given that some startupreneurs may not like to go through all the stress of revving up their popularity, you will have to make a decision to operate under a known brand. This way, you save yourself the headache of trying to make a mark. To do that, you will have to settle between licensing and franchising.

At this juncture, you will definitely be asking, what is the difference between licensing and franchising? If you want to know that, you are certainly one of the hundreds if not thousands of people who don’t seem to grasp the difference between licensing and franchising. However, the good thing is that we will show everything you need to know about it, thus helping you select the option that perfectly suits your startup. First of all, we start with the licensing and franchising definitions.

Definition of Licensing

This is a type of business arrangement where a big firm gives the right to a smaller one to run using the brand name and other key intellectual property (IP) rights. These other IP rights include trademark, technology, trade secret, patent, copyright, and many others. Before the big firm goes ahead to allow the small one to have access to all these things, there must be a legal document that the small one will have to sign. The agreement will ensure that the small one doesn’t expose to competitors the big firm’s classified information.

There is no doubt that an establishment that has given another all of the above has released everything that keeps it in business. Consequently, there must be a legal document that binds the two companies. While the arrangement between these companies will determine how they operate, the terms and conditions are usually the same. If you are trying to understand the difference between licensing and franchising, we believe that we have partly taken care of that. However, just continue reading to learn more about the model.  

Benefits

Why would an organization want to operate under a bigger one? Well, the answer will play an important role in helping you spot the difference between franchise and licensing. Sure, listed below are the benefits:

• It reduces the risk of the two companies
• Increases the revenue of the two parties
• Increases business opportunities of the two parties
• Where applicable, it reduces the risks of making an entry into a foreign market

This explains why companies will hurriedly want to go into this sort of arrangement. If you are wondering how you can perfectly give the licensing and franchising definition, we believe that we have already helped you to understand one of them. Now, let’s go to the other.

Definition of Franchise

Essentially, it is, in most cases, a condition where the owner of the big company retains the IP and then gives the small one everything else that it may require to succeed in business. Although we have consciously streamlined this definition to small and big businesses, however, that is not always the case. But then, nine times out of ten, the arrangement is always between a small and a big one. In some other cases, it could be two big firms. But then, one may be struggling while the other is still robust and doing well in business.

Indeed, companies could also enter into this agreement just because they want to end years of competition, join hands and take over the entire market. Well, when the arrangement is successfully completed, the franchisee, the smaller company, will have to operate with the brand name of the franchisor, the big organization.

So, the reasons vary, but the two parties derive lots of benefits. If you are still looking to figure out the difference between franchise and license, we believe that you should know that already. However, we will still lay more emphasis on that. But before we do that, let’s find out the benefits.

Benefits

Much as this model has many benefits, we will limit them to those below:

• The two parties may bear the burden of coming up with the capital
• It reduces the risk of the two companies
• Increases the revenue and valuation  
• Increases business opportunities
• Where applicable, it reduces the risks of making an entry into a foreign market

Now, we will look at the difference between franchising and licensing.

Licensing and Franchising Comparison Table

Basisi of Comparison	Licensing	Franchising
Intellectual property	It is released	It is NOT released
Product	Have its product	Does NOT have its product
Business model	They are NOT exactly the same	They are the same
Name of parties	Licensor/licensee	Franchisor/Franchisee
Compliance to Agreement	NOT very strict	The franchisee is always monitored to ensure that standards are maintained
Advantage	Vertical integration	More expansion
Term used for the money paid	Royalty	Management fee

Conclusion of the Main Difference Between Licensing vs Franchising

At this point, we must state that we have explained all that you need to know about licensing vs franchising. Obviously, there are lots of the disparities between the two models.

But then the disparity determines the model that a particular party will settle for. With that said, whichever type of arrangement that a party goes into, there is always a financial involvement. And the franchising involves more money than the other. Speaking of vertical integration, there must be trust between the parties involved before it comes to fruition.

If not, it will just fall through. Most times, the owner of the company is the same person but the units that play different roles in the production processes are managed by different persons and do business differently too. Regardless of the model that two firms go into, the sole aim is usually for business growth.

If you are a startup looking to launch your product into the market, the type of model to go for is largely your call; our role is to explain the difference between difference between license and franchise. However, if you are still unsure of the best arrangement to go for, we advise that you seek expert counsel.