If you’re looking to open a business with an already established brand, then you’ve probably heard people make mention of franchising and licensing.
Franchising and licensing are two different business models that each come with pros and cons. At the core, they’re both business agreements in which companies share certain brand aspects in exchange for a fee.
If you’re considering expanding your business, it’s essential to understand the difference between these two terms. Read on to learn about franchising vs. licensing.
What is Franchising?
Franchising a business involves creating an agreement between the franchisor and the franchisee. The franchisor is the person who owns the business, and the franchisee is the person looking to buy into the business by opening their own location.
As a part of the business agreement, the franchisor sells some of the rights to their brand to the franchisee. These rights include their intellectual property, products and services, brand imaging, and more. The franchisee will then open a separate branch under the franchise’s name.
McDonald’s is an example of one of the most popular franchises in the world. Other popular franchises include Burger King, KFC, and 7-Eleven.
The Federal Trades Commission regulates franchises under their franchise rule. All franchises must comply with state laws and rules set by the FTC.
As a part of a franchise agreement, a franchisee agrees to pay fees to the franchisor. These fees go toward opening the new location, using brand imaging, and seeking advice and support from the franchise owner. The franchisor provides both training and expertise to the franchisee.
The franchising agreement tends to be more complicated and deeper than licensing agreements. These common franchising myths can also help you learn more about franchising.
What is Licensing?
Licensing a business involves creating a limited, legal business relationship in which a specific party has rights to use certain registered trademarks of a brand.
The business relationship exists between the licensor and the licensee. To use the registered trademarks, the licensee will need to pay a royalty fee to the licensor. Calvin Klein is a good example of a company that licenses its trademarks to other brands. For example, they have many licensing agreements for their perfumes, jeans, and underwear.
Franchising vs. Licensing: Which is Right for You?
Now that you know the difference between franchising and licensing, you need to decide which one is right for your business. Choosing between the two really depends on the type of business you want to run.
If you’re looking to open up a physical shop, sell products, and have some autonomy over business decisions, then franchising is likely for you. However, if you just want to make use of brand trademarks, then licensing is usually the best option.
Time to Act
Once you’ve made the decision between franchising vs. licensing, it’s time to get all of the legal paperwork sorted out. In most cases, it’s best to hire a lawyer to help you with this, as figuring everything out can get tricky.
For more advice on growing your business, check back in with our blog.