One of the most commonly asked questions in business ownership concerns licensing vs. franchising. It does not help that sometimes the two terms are used interchangeably yet they are worlds apart. The differences affect control, ownership and the use of a brand name or identity. Getting the terms correct, therefore, can mean a lot of power. To understand the differences, one must start by defining each of the terms:
Franchising
Franchising is a way to expand a business. It involves getting a franchisee to run branches of the same business. It is possible to franchise any business type but under the agreement, the franchisor controls the licenses and the brand. They only give the franchisee permission to use the business model and brand. The franchisor also provides training, expertise and other resources necessary to run the business successfully. In exchange, the franchisee invests into the business, helps to build the brand, and pays a fee.
The franchise contract relies a lot on licensing intellectual property. Indeed, the franchise will include licensing. It will detail confidential information, logos, designs and trademarks that are necessary to set up the business and how much control the franchisor retains. Some cases may include patents as well.
Licensing
Licensing relies on the owner retaining the control over their intellectual property but granting other people the right to use it. However, the terms of each licensing agreement will vary. In fact, some licensing can look like franchising where the owner of the property also offers know-how and a patent. For example, a business that has honed a model that is drawing results might give out the process to a similar business in exchange for royalties. Another example is with computer software where the user only buys the right to use the software.
The differences between licensing and franchising
The question of licensing vs. franchising can be divided into three parts to be better understood. It is important to note that these parts work together; they are only separated for the sake of understanding. They include:
Operational control
A licensor will have little control over how their property works. They cannot, for example, dictate how the licensee markets the product in question. In fact, the licensee also gets to determine how they distribute the licensed product. A franchisor, on the other hand, has more operational control. They prescribe how their product is used. They also dictate the operations of the franchisee.
Training and support
A licensor does not have to offer training or support. They can choose to do it, but it is not mandatory. Their responsibility ends at releasing the necessary product knowledge. Meanwhile, the franchisor gives extensive training on how the business is operated. They also provide ongoing support. This support can take the form of monthly visits from a representative of the franchisor, for example.
Fees
Like with the case of buying rights to use a piece of software, the licensor receives a payable fee that is ongoing. In most cases, this fee is annual and lasts for as long as the product or service is in use. For franchising, there is also an ongoing fee. However, the ongoing fee follows an upfront franchise fee.
How a lawyer can help with legal documentation
Neither franchising or licensing is easy. One may be easier than the other, depending on who is looking, but the details of each of them make them complex. When you are pondering the question of licensing vs. franchising, it is important to bear in mind the place of legal counsel. A lawyer knows what matters. They know, for example, the obligations and restrictions you have as the franchisee. They will help you so that your contract does not get terminated because you failed to abide.
A lawyer also helps to keep up with changing franchise laws. They can adjust your legal documentation to fit in with the requirements of the law and of individual states. It is an unwise choice to license or franchise without the help of an attorney. You can contact your local franchise lawyer to learn more about franchising.
