What is a better business model franchising or licensing? It is a very common question asked by traders who want to join a brand and thus start businesses with a company that already has a large base of customers. In this comparison, franchise vs. license, we will start with licensing.
The license is rental of a brand, patent, or trademark, that is to say, its use, and that must be authorized at the end of a contract(license agreement) by its owner. Therefore, a trademark license supposes that the licensor has previously registered it on the U.S. Patent and Trademark Office. Trademarks must be protected regularly for the territory and the contractual services and products.
In some cases, as it is with Starbucks corporation, you can only open the licensing store. This is because of the fact that Starbucks doesn’t offer a franchising option. On the other hand, McDonald’s company uses a franchising model to expand their business, and they operate 93% of their store on the franchising model. Both companies are very successful, so we can see from this fact that franchising and licensing models booth can work well if you know how to implement them correctly.
When you sign a franchise agreement with some company, you will get a full package of products and services. The franchise owner will provide you an education, help, and all support that you need. On the other hand, when you sign a license agreement, you will get less help, so that you will depend more on your own business skills.
When we talk about franchising vs. licensing agreements, you must be aware that these two agreements are completely different. If you are new to this business, it all may seem the same to you. But this is not the case, so you must be well educated before starting with a franchise or license business model.
Also, when you start a franchise, you will need much more initial investment than you will need if you start a licensed store!
Difference Between Franchising and Licensing Agreement
The franchise contract, for its part, necessarily includes the provision of the distinctive signs trademarks. It, therefore, very often involves a trademark license. But in addition to the provision of distinctive signs by the franchisor for the franchisee’s benefit, the franchise contract will include two elements.
The central element is the provision of know-how by the franchisor for the benefit of the franchisee. This know-how must meet certain qualities: it must be identified, must be secret, must be substantial, and must have been tested by the brand.
The franchise contract also imperatively includes permanent assistance, which the franchisor will deliver for the franchisee’s benefit. It is commercial assistance or technical assistance whose modalities can be variable, such as, example animation visits, the provision of software, commercial partnerships, etc.
This assistance aims to enable the franchisee to implement the know-how made available to him correctly and to help him to reiterate the success experienced by the franchisor. The franchise agreement is a more complete contract than a license agreement because it contains much more than the trademark license.
When evaluating franchise vs. license, we must also mention that one of the main advantages of franchising is that the recipient can work under a well-known brand. However, franchises with “sound names” cost incomparably more.
Although the value of the franchise is determined not only by the popularity of the brand but also by the maturity and development of the franchise system, the cost of entering the network of large, world-famous systems is extremely costly, and investments in launching a franchise unit can amount to millions of dollars.
On the other hand, working under well-known companies haw its own benefits because, in addition to a strong, recognizable brand, they offer a proven business model to the franchisee, which has been confirmed through the work of several independent branches.
Working under the auspices of big companies may be a “dream come true.” Still, it is not unreasonable to consider lesser-known but also sophisticated and proven franchises, especially when finances take a big role in your decision.
Franchise agreements include:
- Use of all the benefits of the company trademarks
- You will get suppliers from the franchise owner
- Education on how to manage that particular franchise
- Full assistant and help
- How much will be a franchise fee
When you open a franchise, your store will be under the umbrella of the main company(franchise provider), and therefore your store becomes a part of the collective. This will give you many benefits, and your profit can be much bigger when you have the assistance of real experts in their branch of business.
When you sign licensing Agreement, you don’t get a full package of services; you only get one or more products that you can use in your store. Licensing agreements can be good for people who already have established businesses.
For example, getting a Starbucks license agreement would be wise if you have a small coffee shop. In this way, you can use the Starbucks logo on your cups and the Starbucks logo in your front store. This can get you more customers because you can benefit from this brand’s popularity.
This is not the case only with Starbucks; the license also gives Disney Coca-Cola, etc.
Licensing Agreement include:
- Right to produce and sell goods
- Rights to use a brand name or trademark
- How much will be a royalty fee
In this comparison of franchise vs. license, we must mention that licensing agreement to not include too much in itself, but that does not mean that you can’t benefit from this business model.
What is Better Franchise vs. License
When you want to tackle the issue of licensing vs. franchising, it is important to conduct thorough research that will enable you to make the best choice for your particular case. This is mainly because there are numerous other factors at play here, such as the nature of the business you want to venture into, the state of your finance, and the level of creativity you possess.
On the other hand, it is also very important to consider the relationship that will exist between you (the franchisee) and the parent company, which is the franchisor. It is also vital to ensure that you also understand the difference between the franchise and license.
When you are looking difference between licensing vs. franchising, you have to be aware that with license company grants another company or individual some rights while franchising, on the other hand, basically involves entering into a full agreement with an established business entity.
Before making a decision on what to choose, licensing vs. franchising, it is important to look at the entire scenario from both perspectives in order to make a better decision.
Licensing usually entails acquiring the intellectual rights of a company – trademarks, patents to a certain extent, technology, etc. Franchising, however, differs greatly from this mainly owing to the reason that it involves a contractual agreement that enables you to perform business under the brand name of the particular firm that has already been established on the market.
There are more than 700,000 franchises in the US. They have almost saturated all the markets, which is mainly why you will find the franchises extending to cover salons, restaurants, gyms, and most other service-based industries. It is also up to you to put in the required effort in terms of conducting research so that you may be able to make the best decision when faced with a situation that involves licensing vs. franchising.
People who don’t see the problem in having a close working relationship with the parent company are advised to take the option of franchising. However, if you want to incorporate your personal touches into the business, then you will be limited when working under the franchises.
On the other hand, the licensing vs. franchising review is significant because it will reveal that people who are creative and need to work independently from the parent company should opt for licensing.
Choose a Franchise or License That is Right For You
Those who think about starting a franchise or license business venture know that the calculation is not easy – many factors affect the final outcome. There are many pros and cons of franchise vs. license, so you will need to take steps before deciding which business model is right for you.
Steps that lead to the decision of what to choose franchise vs. licensing:
1.Research and educate yourself about the franchise and license business model
Before you even start thinking about what is better, franchise vs. license, it is understood that you have done a crucial, unavoidable thing – study what franchising is.
See what kind of business relationship it is, explores what the advantages and disadvantages are, what you will get, and what is expected of you as potential franchisees. The first and basic advice will be – gather as much information about the franchise’s way of doing business. Only then will you know whether this way of cooperation suits you or not.
Also, you must research which companies offer franchises to buy and which are more steer to the licensing business model. In today’s society, information has never been closer; you can find all information on the official sites of franchisors or on the articles that deal with these business topics.
2. Ask yourself some question
Ask yourself some of the key questions. First of all, ask yourself if you will be able to “obey” the franchisor’s requirements and the framework in which the system works. Will you mind being “supervised” and asked to show all the documentation, even the financial one? Are you willing to pay for the knowledge and training you need to enter the system? When you find answers to these questions, you will easier evaluate the differences between franchise vs. license.
Remember that a franchise relationship is based on the symbiosis between two parties; one pays for part of its independence (the franchisee) in return to receive knowledge, support, and assistance in the business of the other party (the franchisor).
If at the beginning of the journey you find that you do not want to follow other people’s suggestions, and especially if you want to implement your own unique business ideas, then start thinking about licensing business model.
When you evaluating about what is better, franchising vs. license, start thinking about your interests, desires, and hobbies. In fact, a large number of companies were created in this way – the owners wanted to start businesses in the branch that interests them the most.
While it is a “dream come true” to do a job you enjoy, preferences or interests should not overshadow other equally important criteria for choosing the right business model!
Be guided by your own desires, but look at them from a business angle. Think about whether there is really a demand for the type of service or product you want to offer. In other words, how many people share the same dreams and interests as you and are willing to pay for it.
3. Do you have initial funds to start a franchise or to buy a license
For most entrepreneurs, finances, in fact, play a crucial role in what to choose a franchise or license. Thanks to the diversity and development of the franchise market, today, it can be said that there are franchises and licenses for everyone’s pocket. We must not forget, however, that entering this business model does not only mean investing in arranging or equipping a business unit; you will also need to pay franchise fees.
If you already have the capital to invest in buying or starting a business, keep in mind that you will have a lot of losses before your business becomes profitable. Don’t omit that from the calculation. – Especially if this job will be your only source of income.
Make sure that you have enough funds to get through the initial period. In the first few months after starting the franchising or licensing business model, a lot of money will go to the ”every day” costs that are not included in the first financial projections. So you always need to have available money that will go for unexpected costs.
Regardless of the financial projections that you will receive from the franchisor, it is not out of place to make your own cost and revenue projections. The vision of the franchisor sometimes can be too optimistic.
Ideally, you should make a detailed business plan, which will predict the actual costs and assess how long it can take to expect a return on investment. Take off your “pink glasses” and make an account with a cool head.
Also, if you already run some kind of shop or store, you can buy a license and the right to use and sell some better-branded products. It all depends on you and what you want; as we were mention before franchising and licensing market is very flexible, and you will definitely be able to find some kind of business model that will suit you.
4. Talk to people who already run a franchise or have licensed stores
The best way to get to know what’s better, franchise vs. license, is to study both business systems and then compare them to similar systems on the market. First, look at what the basic requirements of the system are, that is, what is expected from you. This information you will collect in the most painless way from the people who already work by this business model.
Gather as much information as possible from all kinds of sources – browse specialized magazines and portals, search the Internet, see what is written on the forums.
The best source of information will be a conversation with the existing franchise or licensed stores owners. Even if they don’t want to talk about “sensitive topics” (about finances, for example), they’ll certainly mention some new information for you. Either way, you’ll get information that the franchisor itself wouldn’t give you so easily.
5.Talk to representatives of the franchisor face to face
Whatever you have researched a lot and read about the system itself so far, direct contact with the franchisor is crucial. Not only will you get all the important information, but you will also have the opportunity to ask additional questions and talk openly. They will tell you the exact number, and you will be able to see if this business model is right for you.
However, the impression that the representatives of the franchise/license owner leave on you during the conversation should not be underestimated. While this “subjective feeling” may not affect the final decision, it can be an important warning, especially if you are not too sure if is this business model right for you.
The last but probably the most important step in choosing what is better franchise vs. license is a careful analysis of the documents – the franchise agreement vs. license agreement. You may come across data that have previously escaped your attention. This will, in fact, be the last chance to check all the details before signing the contract – read the contract several times.
The franchise or license agreement says a lot, not only about the system but also about the company that will become your partner.
It is possible to start a business by establishing a new entity, buying an existing one, or starting a franchise. Prerequisites are important for starting a new business, among which the most important are a quality idea and the initial capital. When starting a business, there may be difficulties in financing, existing competition, and the process of getting into business, and that is why a franchise or licensed business model may be the right thing for you.
There are many pros and cons to franchise vs. license, and that is why you need to be aware of what each of these two business models carries with it.
The benefits for the franchisee are numerous; the most significant is the use of training programs and consulting services. If you opt for a licensed business model, you will not have as much help from the licensor himself, but you will retain more independence.
It all depends on you and your needs. So weigh well before choosing what is better, franchise vs. license.