Are you unclear about the differences between licensing and franchising? Then let our overview of these two concepts guide you to make the right decision depending on your business goals.
Franchising: terminology and advantages
Most of the time, when we hear the term “franchising,” it refers to the business format of franchising. The franchisor is a company with a strong brand and a well-established and profitable business model or technology. It seeks to replicate that model or technology through franchising to others – the franchisees.
Macdonald’s, Starbucks, and Burger King are examples of well-known companies that have experienced great success and international reach through franchising.
Franchising involves a much higher level of oversight, regulation, and cost than licensing. However, choosing a franchise model ensures a higher level of operational control, which may be the best way to protect your business in the trade.
Benefits of franchisingIf you embrace the franchising model as a tool for business expansion and monetization of your intellectual property, be prepared to reap the benefits:
- Opportunity to receive immediate revenue from your franchisees to use the brand and business model (a flat fee for joining the franchise system, along with ongoing royalties and other franchising fees as specified in the franchise agreement).
- Franchising extends the use and reputation of the brand, technology, or business model to a broader geographic area and audience.
- Franchising ensures a higher degree of operational control of the franchise owner, which can be the best way to protect the brand and its use in commerce.
- Franchising grants the franchisee the rights to an exclusive area or territory to eliminate direct competition with other franchise locations.
Licencing explainedIn a licensing agreement, the business owner, the licensor, grants a licensee the right to use the licensor’s brand name or other intellectual property rights (such as copyrights). The important difference with the “franchising” model is that a licensing agreement typically does not involve replicating an existing business format. But as with franchising, the licensee’s business benefits from the licensor’s brand and intellectual property, and the licensee pays fees to the licensor accordingly.
The perfume industry is a good example of this – the majority of all known fragrances are manufactured and distributed by just two or three major perfume houses. Calvin Klein, Cerruti, Vera Wang, and Chloe, for example, are all manufactured and distributed by Coty under license from the brand owners. Similarly, the revenues that companies such as Disney, Warner Brothers, and BBC Worldwide derive from the licensing of merchandise in many cases exceed the profits from the corresponding film or TV rights.
Growing the business through licensing does not require as much time and financial investment as franchising. Therefore, licensing can be a more cost-effective solution to expand, at least in the beginning.
Advantages of licensingGet into the licensing model if you want to reap such benefits from your intellectual property:
- A license is easier to manage than a franchise.
- License agreements are cheaper and easier to set up than a franchise and less demanding in ongoing management time.
- A license can be granted to a third party who can use it in a consumer sector where the license holder has no presence or expertise.
- Licensing works well when the licensor has developed a particular technology, know-how, brand image, or design that is attractive to licensees who want to integrate it into their existing business (e.g., software and database technology are always exploited through licensing).
If your goal is to expand and grow your brand through additional outlets or service areas, franchising is the proper legal model, and licensing is not an alternative.
However, before choosing a franchising business expansion model, keep in mind that not all countries have a clear and transparent regulation for this particular contractual area. Sometimes the laws are so extensive, complex, and ambiguous that you should consult a very experienced IP Expert and lawyer.
Should you decide to franchise before entering a new market, make sure that local laws govern intellectual property, and that the franchise agreement contains clear clauses on how the brand name, designs, and trade secrets such as production techniques are protected.
Suppose you want stable royalty income but have limited time and financial resources to get started and want to secure the business against unfair competition by controlling how other businesses use your brand. In that case, the licensing model is for you. Unlike franchising, licensing agreements are a well-regulated area worldwide.
Both franchising and licensing can make your business a success if you have spent some time researching which concept is best for you. INTEROCO Copyright Office Dubai was established to help businesses in the MENA region understand the process of registering a copyright and other intellectual property rights. We not only provide IP protection services for individuals and businesses but also offer solutions that will allow monetizing your IP assets boosting your business growth. Contact us today to see what we can do for you.