Franchising and licensing are often lumped together when average people discuss business expansions. There are some key differences, though, that both sides need to be aware of when engaging in this type of business transaction. The main trade-off between the two is the infrastructural support you receive as a franchisee versus the operational freedom licensees are granted.
A franchisor positions franchisees for a great chance of success in their endeavor by instituting tried-and-true business practices, while a licensor allows both parties to flourish rather independently. Fast-food and other types of chain restaurants are common examples of franchises. It is not uncommon, though, for large, multinational corporations – such as Starbucks – to have a mix of both.
Franchising
Businesses with a well-established brand commonly seek to expand by leasing out franchises to responsible franchisees. In exchange for keeping a tight leash on the franchisee, the franchisor will give extensive support, such as site location for a brick-and-mortar store, training for new employees, and other forms. This is a common way for large companies to expand into new territory.
Licensing
Once you or someone else identifies a desired brand, there will be an initial down payment of sorts on licensing fees, in addition to an agreement specifying future royalty amounts. A typical licensee, most often, is an established business that is seeking to expand its line of products. The licensor can retain certain rights, such as the right to periodic inspection of the brand usage. However, the licensor is limited in the ways it can exert control over the licensee’s day-to-day operations.
Licensing vs. Franchising in Practice
Let’s say you, while Christmas shopping for your young daughter, see a nice pair of pajamas adorned with Ariel from The Little Mermaid, which is a Disney film. Do you suppose Disney owns and operates a clothing factory that produces garments like that pair of pajamas, or are there thousands of factories across the world licensed to make Disney apparel? The smarter choice there is the latter, and Disney didn’t become a multibillion-dollar company by accident.
The Little Mermaid has become, since the original 1989 movie, a media franchise. There are now numerous video games, movie sequels, spin-off television shows, a live stage performance, and other derivative works. The substance of these works are included in The Little Mermaid franchise, which is tightly controlled.
Which is Right for You?
Both franchising and licensing can be major financial boons for companies. It is important, though, for both parties to be specific about the amount of control they desire when deciding to commence an extension of the original business. Otherwise, there is a potential for litigation to step in and alter the business relationship. Make sure all your business’s details are looked over by an experienced legal team today by calling us at (305) 614-8137.
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