Licensing and franchising are two popular types of business models that have been the launching point for many small businesses. They both offer new entrepreneurs a degree of safety that comes from the association with a big brand that has an established clientele. However, these two business models are very different from each other.
If you’re looking to start your own business, you need to know the differences between licensing and franchising. Which is the right one for you?
What is franchising? How does a franchisor differ from a franchisee?
Franchising is a business model in which a business allows franchisees to purchase the right to own and operate an extension of their brand using proprietary products and intellectual property in exchange for franchise fees and strict adherence to franchise guidelines.
A franchisor is the entity that sells franchise rights to their brand to franchisees. A franchisee uses their own capital to start up the new franchise location to become franchise owners. The relationship between a franchisor and a franchisee is guaranteed by a signed contract that specifies the duties and responsibilities expected from both sides.
What is expected of a franchisee?
A franchisee pays fees for the right to operate a business, participate in a standard operating system, and use the brand name and proprietary information of the franchisor. Additionally, a franchisee is expected to follow specific franchise guidelines on how to run the franchise location as directed by the franchisor.
What does a franchisor provide to a franchise owner?
Meanwhile, franchisors also have a role to play in the franchising process. In return for the fees paid by the franchisee, franchisors agree to provide franchisees with ongoing support and training. Franchisors help franchisees open new locations and provide marketing campaigns that build their customer base.
In this relationship, a franchisee gets all the advantages of remaining self-employed, but without the risks that other small businesses have to face by themselves.
At the same time, the franchisor retains control over their own brand and some aspects of the franchise business operations, giving them continued influence over their franchise location. In this way, the franchise model allows a business to expand their brand at a lower cost than opening new locations themselves.
Franchises Summarized
In general terms, a franchisee can be thought as owning and operating an independent branch of the franchise company. The franchisee sells the product or service supplied by the franchisor in a way that adheres to established franchise guidelines.
And although this relationship offers more control to the franchisor, another way to consider franchising is that franchisors won’t have to worry about franchise-wide concerns. Instead, franchisees can concentrate on their own franchise location that they have invested in.
What is licensing? What’s a licensor and a licensee?
Licensing is a business model where a brand allows a licensee to use, make and sell an idea, design, name or logo in exchange for a fee.
The licensor provides access to the licensee on a contractual basis, all while retaining ownership of its own intellectual property. In return, the licensee pays the licensor royalties that are usually a set percentage of the licensee’s sales.
What’s the difference between licensing and franchising?
A major difference between licensing and franchising is that a licensor won’t provide a business model or support that a franchisor normally gives to a franchisee. As well, a licensing agreement is often less expensive and doesn’t take as long to implement than those found in a franchise model.
As well, licensing results in a relationship where licensors don’t have as much influence over the entities that license their property. Licensors may dictate terms over how their intellectual property is used, but not how the licensees operate their business.
How does licensing benefit licensors?
Licensing is great for licensors because they retain ownership over their intellectual property while expanding their businesses without having to invest in new locations or deal with the responsibility of supporting their licensees.
How does licensing benefit licensees?
By following a licensing model, licensees are given greater autonomy to run their businesses. Because they don’t pay royalties, licensees can experience higher profit margins.
In this relationship, however, licensees won’t benefit from the support and guidance of a head office that has the experience of successfully opening other franchise locations.
Franchising vs Licensing
In the end, an entrepreneur starting out with their own business needs to properly assess their needs and goals to see if a franchising or licensing model is right for them. But as we see, only one out of the two is poised to work in a collaborative relationship committed to the mutual benefit of both parties.
Are you interested in franchising? Do you want to work with a trusted franchisor with over 70 franchise locations across Canada? Come find out how becoming a franchise owner with St. Louis Bar & Grill can benefit you! Become a franchisee today! See if becoming a franchise owner is right for you by reading our blog! Find out how the franchise model works, when is the right time to buy a franchise, and how you can stay resilient during your first year as a franchisee!
