Franchising Vs. Licensing A Business — What’s The Difference?

When it comes to franchising, there are a lot of terms you need to know. However, there is one word that causes confusion for many entrepreneurs — licensing.

To clear things up, we’ve addressed some common questions about licensing.

What Is A Licensing Agreement?

Under a licensing agreement, a company sells the right to use its intellectual property to other companies.Under a licensing agreement, a company (original rights holder) sells the right to use its intellectual property, such as a product or logo, to other companies.

A common example of licensing can be found in your kid’s happy meal. When a toy featuring a movie or television character appears in that little box, it has been licensed from the original rights holder to the fast food company.

Another well-known type of licensing agreement involves logos from sports teams. That favorite team hat of yours wasn’t made by the team; the company that makes the hat pays the team for the right to use their logo through a licensing agreement.

Is A Franchise A Type Of Licensing Agreement?

In a word, no. Though a franchisor sells the right to use its intellectual property, a franchise agreement is not considered a licensing agreement for many reasons, which we touch upon in response to the next question.

What Are The Differences Between Franchising And Licensing?

There are many operational, legal and financial distinctions between franchising and licensing.

Operational Differences

The major difference between franchising and licensing is the establishment of operational standards. Under a franchise agreement, the franchisee gains the right to use not only a logo and a name, but the proven business model that makes a company successful. In addition, it also requires that the franchisee follow these established procedures, which is done for the benefit of the franchisee, the franchisor and the customers.

Along with receiving the right to use the business model, franchisees also receive support from the franchisor in the form of initial training and ongoing guidance.

Equally important is the fact that, in many franchise systems, franchisees are granted territorial exclusivity, meaning they are the only ones entitled to use the company’s name and sell the company’s product or service in a given area. Licensing provides no such protection.

Legal Differences

Franchises and licenses are viewed very differently from a legal perspective.Franchises and licenses are viewed very differently from a legal perspective. Franchises are governed by an area of law called securities law, which is concerned with transactions, while licensing is considered a type of contract law.

In addition, when you operate a franchise, you must follow a specific set of legal requirements, including securing registration, permits, employer identification numbers, etc. No such requirements exist when it comes to licensing.

Finally, franchisors are required to provide you with a franchise disclosure document (FDD), which provides extensive information about the franchise, including its financial performance, business model, growth strategies and other pertinent details. The FDD offers new franchisees tremendous insight, as well as peace of mind.

Financial Differences

Royalties are collected under both a franchise agreement and a licensing agreement. However, because you are getting so much more than just a piece of intellectual property — you are getting your own business — there are startup costs associated with starting a franchise as well.

Experience The Difference For Yourself

Now that you know the difference between franchising and licensing, how about exploring the differences between life as a franchise operator and your current career? Check out our ultimate guide to transitioning from the workforce to franchise ownership. Download our free e-book today!

Images: Happy Meal, Gavel

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