Franchising or Licensing: The Choice Is Yours
Have you been considering expanding your business one way or another?
If we could take a guess, you’ve probably heard the terms franchising and licensing before, maybe even in the same sentence. And even though they might appear very similar concepts, each has its own unique structure.
The one crucial factor they share is that they both offer business opportunities with some of the work already done for you, but they’re not exactly the same. You might start to consider either of them when you want to grow your business- when you’re looking into expanding and adding new locations and services to new territories.
And we know that when it comes to deciding to take the leap and expand your business, you’ll be faced with a choice, to franchise or license your business.
The good news is we’re here to help. Let’s dive into each concept hoping it will help guide you to make the best decision.
A franchise is an extension of a business. With a franchise, you are investing in an established business, and you are given specific instructions on how to operate it. The thing is, you don’t necessarily need a specific set of skills to run a franchise in a certain industry.
Another aspect of franchise ownership is that you are committed to following the franchisor’s system, branding, and operating procedures. You are also restricted from doing business within a specific territory as established in the signed agreement. The franchise agreement or FDD is the key element of a franchise. But don’t worry, we’ll expand on this a bit further.
You’ll need to provide the franchisees with a list of approved vendors and negotiated terms, tech stack including their POS system, staffing and training assistance, branding, recipes, marketing materials, financial projections and the territories that are permitted for expansion. It will be necessary to continue to support the franchisees by visiting regularly, providing ongoing guidance and advice, and monitoring their financial reports.
Providing quality tools, a great brand, and ongoing mentorship is an excellent way to expand your business. The franchisee might feel like there is a loss of control because they must follow the franchisor’s system. But, if what you’re looking for is exactly that, then you’ve found your choice.
Four Things Distinguish a Business From a Franchise?
The first one is an ongoing commercial relationship with the franchise owner. Owning a franchise should feel like being one of two puzzle pieces that belong in the same box. Never separate from one another, since they’re both part of the same business (and brand), forming part of a bigger picture.
The second one is to have a written agreement between you and the franchisee. Every franchise must issue a franchise disclosure document (or FDD). This extensive legal document contains 23 specific items about the franchise and is disclosed to prospective franchisees before a franchise may be sold.
The FDD includes specific information about the franchisor, the franchise opportunity, fees charged by the franchisor, the legal relationship between the franchisor and franchisee, and other information about the franchise offering.
The third aspect that differentiates a business from a franchise are:
- license of a trademark, which will include all the brand elements you would need.
- branding elements and guidelines, their standards, and preparation modes.
- intellectual property.
And the fourth one would be the payment of a fee to the franchisor.
When To Franchise
Now that we can distinguish a business from a franchise, let’s dive into some reasons why your business should consider franchising.
- Your business is ready to expand. You have systems in place, such as production standards, a supply chain, training practices etc. Your unit-level economics are exactly where they should be, and your business is successful.
- You’re ready to invest. When becoming a franchisor, you’ll need to keep in mind the commitment and capital you’ll need to invest, especially during the first 1-3 years. You will need to invest not only money but time and training for all staff and employees.
- Your mindset as a business owner or entrepreneur. Believe it or not, the success of any business comes down to you as a founder and your original management team. Your mindset should be prepared to learn, grow, and take advantage of every opportunity presented.
Licensing involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual property in exchange for a percentage of revenue or a fee.
When looking to expand your business, licensing is a fast way to generate income and grow a business, as there is no manufacturing or sales involved. Instead, licensing usually means taking advantage of an existing company’s reputation and branding in exchange for a small percentage of revenue. A license agreement will have very specific instructions on what you can and cannot do with licensed asset and it’s very important to remain within these obligations
Licenses do not typically come with restrictions in terms of a territory or market for the exclusive use of the licensee. They are governed by standard contract law, so there are fewer administrative burdens for both parties than with a franchising arrangement.
What Is The Difference Between Licensing and Franchising?
The main difference is that with licensing, you get a particular asset of the company, not the entire business.
Think of it as deciding what type of menu you’d like to offer to your guests. The first option is a prix fixe menu, which will give you total control over the guest’s experience by making all the choices for them. This will of course, require a fully trained staff ready to take on a more complex task but delivering the highest quality service.
The second option would be offering a la carte menu, where it would be much more simple and it would require less effort on your part, since your guests get to make all the choices. This would also mean that you’re letting go of the control over the guest’s experience in a way, allowing them to guide their own experience.
Both options would help your business in your mission to grow, but it will all depend on your business model, goals, present situation, and visualizing what you want your business to look like in the future.
Where do you see your business in the next 3 years?
What do you need to take it there?
The choice is yours.