For the aspiring entrepreneurs among you, searching for new business opportunities, you may have come across the terms franchising and licensing. Although these concepts may appear to be quite close in nature (and in some cases, they are), there are significant differences between these two models.
So, if you are looking to discover what is licensing and franchising in simple words, this post is for you. Here, we go into depth about what licensing and franchising are as well as the key differences between the two.
Let’s explore this topic in more depth below.
What is a franchise?
In simple terms, a franchise is a type of business, which is established, has a proven business model and a solid industry reputation. Through this business’ expansion efforts, a franchisor can grant other parties (franchisees) the right to use the business’ intellectual property, proprietary systems, business model and brand name to operate a type of “branch” of the company.
When a franchisee runs this “branch”, they are required to follow the franchisor’s operating requirements quite strictly. However, there are many benefits to running this type of business, not least of which is the profitability associated with a proven business model and an established industry brand.
This is done in exchange for an initial franchise fee, which is akin to buying the rights to running the business. However, franchising involves other operational costs as well. This is in addition to royalty payments that franchisees pay on a regular basis, either as a fixed fee or a percentage of gross revenue.
There are also marketing and advertising fees, which are also often expressed as a percentage of gross revenue and these contribute to a broader national marketing fund that enables the franchisee to take advantage of national and local advertising initiatives that can help the franchisee get more clients.
Some of the first steps in terms of getting involved in a franchise include discovering more about the business before signing the Franchise Agreement. But what is a Franchise Agreement? This is the legal document, which sets out the grounds for the future business relationship between the franchisor and the franchisee. It contains a detailed account of some of the following aspects:
- The key terms of the business
- All relevant procedures
- Non-compete clauses
- Training and support
- How long the business relationship will last
- Payment of royalties to the franchisor
- Renewal and sale rights
- Termination clause
- Rules around renewing or extending the agreement
Overall, the British Franchise Association (bfa) has studied this billion-dollar industry and has confirmed that running a franchise business is a much more solid business model to follow as opposed to launching a start-up. The latter have a higher failure rate and they are also more difficult to get financing for.
What is a licence?
We now move on to licensing and it’s a good idea to address a frequently encountered misconception about this business model. It is common to ask the question: is licensing a form of franchising? However, the answer is “no” because licensing and franchising are completely different models, despite the fact that they have similarities in some cases.
For instance, if you are wondering how does licensing work in the UK, a short and simple answer is that under this model, a company sells licences to third parties. These licences enable the third-party to use the brand’s intellectual property, design, brand or business programmes. However, the licence’s purpose is to use these aspects and not own them.
What is worth emphasising is that these licenses are non-exclusive and the licensor doesn’t control the licensee’s business operation, as opposed to a franchise. In a franchise operation, the franchisee is usually limited in terms of operating within a specifically designated geographical area to ensure that other franchisees do not cannibalise the market. In licensing, this is not the case.
Much like franchising, licensing also offers licensees a license agreement. Let’s explore what is a Licence Agreement and the points that it includes. A Licence Agreement should cover the following things:
- The scope of the property being licensed
- The licensor and licensee
- The purpose for using the property
- Confidentiality terms
- Payments or royalties
- Any rights to transfer
Therefore, when it comes to franchising vs licensing, there are important differences in the rights and scope of obligations that a licensee vs franchisee have. Below, we explore the key differences between licensing vs franchising so that you gain a better grasp on these concepts.
Difference between licensing and franchising
By now, you should have a broad idea of the differences between licensing and franchising. However, to make things simple for you, we’ve created a table that outlines these key differences. Here’s what you should be aware of when considering whether to sign a license agreement vs franchise agreement.
|Points of difference
|Relationship between the parties
|In franchising, the relationship between a franchisor and franchisee is close as the franchisor has a vested interest in the franchisee’s success
|There is no close link between the licensor and licensee because the licensee works as a separate entity. They are not a part of the parent company and they have no territorial authority
|Training and support
|Franchisees get extensive training and support from the franchisor
|Licensees usually do not get training and support from the licensor
|Costs can range from low investments to high investments
|Costs are considerably lower than a franchise
|Freedom to run the business
|Every franchisor has different requirements for marketing and sales of their franchise opportunities, which franchisees are obliged to follow
|A licensee has more freedom to run their business when it comes to marketing and sales. However, there may be strict controls on some licenses, subject to strict terms and conditions.
|Launching the product or service
|The franchisee receives full support from the franchisor when it comes to launching the product or service to market
|The licensee bears the cost of launching the product or service, investing in new locations or distribution networks
|Levels of control
|The franchisor exercises strict controls over how a franchisee operates
|The licensor usually has little to no control over how the licensee operates
|Franchisees are typically granted an exclusive geographical territory
|Licensors can at times license their intellectual property to two or more businesses in the same area, forcing them to compete directly with each other
|Marketing and advertising
|Franchisees are obliged to follow the franchisor’s marketing and advertising guidelines
|Licensees have the freedom to market their products or services as they wish
|Franchisors often monitor their franchisees’ performance quite closely according to set criteria
|Licensors do not monitor licensees’ performance due to the limited control over their activities
|Franchisees are required to pay franchisors for the use of their property, including royalty fees and making contributions to the franchisor’s marketing and advertising fund
|Licensees are required to pay the licensor for using their intellectual property, although these fees are usually lower than a franchise
|A franchisee and franchisor have a continuing mutual benefit, which adds to the strength and potential success of the relationship
|A licensor and a licensee often don’t have a relationship that is nurtured over the medium- to long-term or enjoy reciprocity due to the absence of a mutually beneficial support system and overall relationship
Although licencing may seem like an attractive form of business ownership, it’s worth noting that it doesn’t offer exclusivity in terms of geographical operational areas, training and support offered or marketing and advertising that ensures consistency in terms of how the brand is marketed.
Franchising, on the other hand, offers each of these benefits and more, enabling the franchisee to enjoy a rewarding and profitable business with extensive support — from launch through to ongoing daily operations and obstacles that may arise.
One franchise opportunity you do not want to miss is the Belvoir opportunity for running your own property franchise business in the lucrative property market. So, if you want to buy an estate agency franchise, don’t hesitate to get in touch with us.
Our friendly and helpful team is here to answer any questions you may have so that you have greater peace of mind knowing that the franchise opportunity you’ve chosen is the ideal option for you and your personal and professional goals.