Franchising vs. licensing
is a question we are asked all the times. Often times, the terms licensing and franchising are used interchangeably to define a similar business relationship. What is the difference between franchising and licensing? Why do some organizations choose licensing over franchising to define their expansion model?
The key comes down to control…
A license agreement is essentially a “portion” of a franchise agreement.
Licensing refers to a relationship that licenses a name OR a system to a business partner who will have rights to distribute or do business with that system or trademark. Licensing is typically used in cases where technology is being sold through a distribution system. Software, hardware and other forms of technology are often sold through licensed resellers or distributors.
Licensing can also refer to a business relationship where only a name is licensed out to a business “partner” who then can do business using a trademark or servicemark. This could be a scenario where a company has developed a brand and would like to license the rights of just the name out. There cannot be a business system associated with these license rights, only the brand name.
Franchising is a combination of the name, brand or trademarks along with the business system. A franchise model requires the use of a UFDD, or Uniform Franchise Disclosure Document that clearly identifies and discloses the details of the business relationship and commitments required from both the franchisor and franchisee. Because franchise relationships include both the name and the business system, the franchisor retains the ability to control the operations and quality of service delivered by the franchisees who join the system.
Franchising is governed by the Federal Trade Commission in addition to local state laws and franchise regulations. A franchisor is held to strict processes and rules in how they may present a franchise and how franchise sales can be conducted. There is a significantly larger amount of regulation, process and cost associated with being a valid and compliant franchisor, so why do most organizations choose to develop a franchise system as opposed to a license model?
There are several reasons, but the most significant reason being control. Franchise expansion allows the franchisor to control the quality of the franchisee’s business and services delivered. This allows the franchise system to control when and how the brand is used in commerce. Franchisors have the ability to stop franchisees who are not representing the brand in a conduct that is deemed appropriate. A well written and defined UFDD allows for an efficient and effective business relationship that also provides legitimate control to the franchisor and the ability to shut down a franchisee who is not meeting the standards of the franchise organization.