Licensing and franchising are two of the business models used by companies to expand their operations and enter into a new market. There is a significant difference between the two models, however, it is not always easy to differentiate the two. This article will discuss the definitions of licensing and franchising, followed by the differences between the two.
Definitions and meanings
Licensing refers to a business arrangement formed between two parties, in which a company allows another company to use its intellectual property for a given period and under specific conditions by issuing a license. This would include the manufacturing process of the company, its copyright, trademark, brand name, patent, technology, etc. The company that allows another company to use its intangible assets is known as licensor, whereas the party to whom the license is given is known as licensee. The licensor charges a fee or royalty from the licensee for using their intellectual property.
To state it more simply, licensing signifies a business model in which the product-based knowledge of a company is rented to another company, because of which the company is able gain entry into a new market.For example, Coca-Cola and Pepsi brands have provided licenses to local bottlers in various countries all over the world to produce and sell their beverages.
Franchising refers to a business model in which a company (known as franchisor) allows another company (the franchisee), to use their successful business model and brand name to run an independent branch of the company. A significant amount of authority is maintained by the franchisor over the tasks and procedures being carried out by the franchisee, while also facilitating other aspects of the business, such as marketing and branding support that helps the franchisee in running the business. The franchisor provides training, knowledge, marketing and other resources and skills to the franchisee to operate the business according to its business model.
Franchising is used by businesses to expand their business after they have gained success. Companies look for franchisees that have the required skills to run branches of their business. A popular example of a business that has expanded its business all over the world through franchising is McDonalds.
Differences between licensing and franchising
The difference between licensing and franchising is explained by the following six points:
Licensing refers to a business arrangement, where a company (licensor) sells its intellectual property to another company (licensee), or the right to produce its products, for a specified fee (royalty). On the other hand, franchising is a business model whereby a company (franchisor) allows another company (franchisee) to use its business model, process or brand name for a fee. In this arrangement, the franchisee operates as an independent branch of the franchisor.
In licensing, a licensing agreement is established, in which there is a one-time transfer of rights or property to a party in return for a specified fee. The licensor does not offer technical support in majority of the cases. In contrast, in franchising, an extensive agreement is established between the two parties, wherein the responsibilities and obligations of the parties is specified. The franchisor provides skills and expertise to the franchisee to set up and run the business according to its already established business model.
3. Applicable to
Licensing usually pertains to products like patented software technologies, whereas franchising is relevant to the provision of services, such as food chains, automobile service centers, etc.
The franchisor provides training, knowledge, marketing and other resources and skills to the franchisee to run the business according to its business model, which is not the case in licensing.
In licensing, the licensor controls how the intellectual property is used by the licensee, which conforms to the licensing agreement established for the licensed product. However, the licensor has no control over the business operations carried out by the licensee. On the other hand, franchisor imposes a significant amount of control over the business of the franchisee, with respect to the quality of service offered and marketing and selling approaches used.
6. Legal bindings
Licensing is regulated by the Contracts Law, while in most of the countries, franchising is regulated by the franchising regulations. However, if these are not present, then Companies Law is used to regulate franchising agreements.
Licensing versus franchising – tabular comparison
A tabular comparison of licensing and franchising is give below:
|An arrangement in which a company (licensor) issues a license to another another company (licensee), to use its intellectual property or to produce its products by paying a specific fee (royalty).||An arrangement whereby a company (franchisor) allows another company (franchisee) to use its business model or brand name for a fee so that it can function independently from the parent company .|
|A licensing agreement is established, in which rights or property are transferred to a party||An extensive agreement is established, wherein the responsibilities and obligations of the parties are specified|
|Products like patented software technologies||Service-oriented businesses, such as food chains, automobile service centers, etc|
|Training and support is not provided by the licensor||Franchisor provides training and support to the franchisee to run the business|
|Licensor controls how the licensee uses its intellectual property, but it has no control over how the licensee runs the business||Franchisor controls the business operations carried out by the franchisee to a significant extent|
|Bound by the Contracts Law||Bound by franchising regulations of a country, or by Company Law|
Conclusion – licensing vs franchising
A company’s decision regarding which arrangement to use to expand their operations into a new market depends on various factors, such as the kind of product/service they are seeking to expand, the competition in the market, the degree of investment involved, and so on. Generally, franchising involves a greater degree of formalities and expenses because it pertains to the entire business format. Hence, companies need to consider all of these aspects before determining which model is most appropriate for them.