Did you know there’s a business model other than franchising available to entrepreneurs that want to leverage the systems and likeness of an already successful business model? You could license a businesses instead. In fact, some entrepreneur prefer a license agreement to getting involved in a franchise. Learn the differences and advantages of each option below.
- What Is a License?
- What Is a Franchise?
- What are the Differences between Franchising and Licensing?
- How Much Does a Franchise Cost?
- How Much Does Licensing Cost?
What Is A License?
A license is a limited, legal economic relationship in which a particular party is given permission to utilize specific intellectual property rights, such as a trademarked name for a brand, a patent, or technology, in accordance with predetermined guidelines. The licensee (the party who is granted the rights to use them) and the licensor, who is the owner of the trademarks, are business partners.
A license permits the licensee to use, create and sell a concept, design, name, or logo for a cost. They are helpful to licensees because they enable business growth without the need to invest in additional facilities or distribution systems. The licensee reimburses the licensor an agreed royalty fee in exchange for the right to use the intellectual properties of another company. Click here to learn about specific licensing options like Starbucks.
What Is A Franchise?
A franchise is a contract between a franchisor and a franchisee. The franchisor is the proprietor of the business (for example McDonald’s). The franchisor sells the rights to their business model, including goods and services, intellectual property, supply chain and more to a franchisee or operator who will run the business system.
A franchise is an ongoing partnership in which the franchisor grants the franchisee a business license and offers support with training, marketing, planning, organizing, merchandising, and managing their operations in exchange for initial and ongoing fees from the franchisee.
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Licensing is a general and simpler business partnership and agreement than franchising. A franchisor keeps control over just how its branding is utilized and the way each franchise run under its name. In a franchise partnership, the franchisee and franchisor are highly interdependent.
What are the Differences between Franchising and Licensing a Business?
There are observable distinctions between franchising and licensing despite the resemblance in their definitions. Here are some of the differences between the two business models.
The franchisee is the owner of the business in a franchise arrangement. Franchisees essentially manage the company for the franchisor for a fee. In a license agreement, the licensee only makes payments to the licensor for the use of a single product, maybe one for which the licensor has obtained patent protection. The remaining portions of the industry, which do not require the licensor’s products, may, however, continue operating independently.
Control and Influence
The franchisor can specify rules in a franchise agreement for how the franchisee should conduct the operation, where to situate it, and how to utilize the brand’s trademarks in marketing. In other words, since a franchisee’s business is effectively an extension of the franchisor’s own, the franchisor can exercise a significant amount of authority over the franchisee’s business and how it runs.
In contrast, the amount of influence a licensor has on a licensee’s business is quite limited. The licensor can set restrictions on how the licensee may use protected marks, but they have no additional authority over the licensee’s operations.
In reality, this is where the two differ most fundamentally. In contrast to licensing, which can be used for both items and services, franchising solely deals with the delivery of a particular service. Franchise opportunities exist for businesses like restaurants and salons, but not for the goods they utilize to deliver the services they offer.
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The restrictions imposed on licensing agreements are among the key distinctions between franchising and licensing. Compared to a franchise, a license is significantly more constrained. You also don’t own the business with a licensing opportunity. You’re only operating it per the guidelines of the brand.
Using registered trademarks is the only thing that a license agreement permits. Franchise agreements, however, permit the use of trademarks, extra intellectual property, goods, services, an operational manual, and much more.
The methods employed are another difference. The seller (the franchisor) assists the franchisee in setting up the necessary mechanisms in a franchising relationship. Such technical support is frequently absent from licensing agreements.
A franchise contract is typically a significantly stricter and more complicated contract. A franchise deal has many moving components, but a license arrangement is just a simple lending of certain protected brands or images. Company law regulates franchising regulations. In contrast, licensing rules are regulated by contract law.
Compared to a license arrangement, starting a franchise involves a lot more legal formalities and compliance with regulations.
What are the Similarities of a Franchising and Licensing a Business?
Though the differences between licensing and franchising can be simply itemized, the similarities between these two business models are few. Here are some resemblances between licensing and franchising.
General Contract Law
Both licenses and franchises must adhere to general contract law. Additionally, certain states have added rules that are in addition to the federal laws governing franchises.
Corporate Resources And Intellectual Property Rights
Franchise agreements and license agreements both deal with the shared use of the commercial property and intellectual property. License agreements vary from franchise agreements in which the licensor does not have control as to how the licensee conducts the underlying business and that license agreements have more restrictions than franchise agreements. A license agreement may result in an unlawful franchise relationship if it is drafted incorrectly and gives the licensee too much power over the core business.
Advantages to Licensing a Business
Finding the best business model for you requires more research than simply understanding the distinctions between franchises and licenses. It’s also helpful to be aware of the advantages and disadvantages between licenses and franchises. Some of the advantages of pursuing a licensing business include the following.
1. Independence – The licensee’s autonomy is one advantage of licensing. Typically, two well-established businesses may enter into a license arrangement. A protected mark with an established loyal base that is already well-known and valued by the licensee is being purchased. Because of this, investing in licensing is safe and a wonderful way to grow your business.
2. Simplicity – Another benefit of licenses over franchises is how straightforward the arrangement is. The license agreement will be rather easy to understand since it only pertains to the application of one (or a small number of) protected marks. Generally speaking, a license agreement is simpler and less expensive to launch than a franchise venture. There are fewer demands with effective implementation.
Advantages to Franchising a Business
Though licensing is considered a simpler and less complex business model than franchising, a franchising business has numerous advantages. These benefits include:
1. Fewer Startup Risks – One advantage of becoming a franchisee is that you can enjoy all the advantages of being an independent business owner without taking on the risks associated with opening a startup company. The advantage of entering into a franchise is that the business strategy is already tested and the clientele is already in place. Even though there may be large costs associated with buying a franchise, they may still be less expensive than starting your own business from scratch. Buying a franchise is frequently significantly less hazardous than building a firm from scratch.
2. Client Base Expansion – This benefit is primarily for the franchisor. As the franchisor, franchising your business to an entity increases your clientele while preserving the value of your brand. You are practically reaching out to a vast number of untapped markets just by franchising your operations to other individuals or businesses.
3. Shared Relationship – Having a mutual relationship is another advantage of franchising. By delegating a portion of the work to franchisees, the franchisor can quickly expand its business while lowering its own workload. Moreover, the franchisee collaborates with the franchisor to run the company and pick up whatever business skills they may be lacking.
4. Symbiotic Relationship – The dependence on the partnership between the franchisor and the franchisee is one of the major advantages of franchising over licensing. Although the franchise agreement may be complex, it also offers a variety of opportunities. The franchisee is responsible for paying the costs associated with updating the location of their business to conform to brand requirements. Franchisees receive priceless mentoring in exchange.
Disadvantages to Licensing a Business
Where there are advantages, there are also disadvantages to engaging in licensing a business. Let’s look at some of these disadvantages.
1. Limitations – The restrictions are the main disadvantage of licensing over franchising. Only specific protected marks are accessible through the use of licenses. This limits the partnership, but your company may not require anything more than that. Additionally, it’s critical to confirm that you have taken these precautions to safeguard your intellectual property before signing a licensing deal.
2. Purpose – The fact that many people are unaware of the full value of licenses is another disadvantage. There is a lot of misunderstanding on whether to establish a license agreement and when the licensing agreement crosses the line into a franchise. Prior to actually signing a licensing or franchising deal, make sure to get legal advice from an experienced attorney.
3. Control – This is a disadvantage on the part of the licensor. You risk having your reputation tarnished as a licensor by giving up a great deal of control over the caliber of the goods and services the licensee will deliver.
Disadvantages to Franchising a Business
Franchising also has its downsides. Here are some examples of the disadvantages of franchising.
1. Lack Of Control – The lack of control is one disadvantage a franchisee faces. Although it is your company, the franchisor will make the majority of the important business decisions or will at the very least need to authorize them. Although this assistance may be useful when learning the business’s ins and outs, it may come off to more seasoned business owners as micromanagement. This leverage, however, works in the franchisor’s favor because it allows them to continue to manage how their brand is utilized.
2. Probable Hefty Costs – A franchise will appear to be considerably more costly and difficult to get than a license. There are recurring fees to consider, in addition to the initial franchise fees, which can range from $10,000 to $50,000. Despite the fact that it may appear expensive, keep in mind that you are gaining access to a whole industry. A licensing agreement, in contrast, only permits you to use particular trademarks in limited circumstances. This means that a license will be less expensive and difficult, but it also grants you access to far less.
How Much Does a Franchise Cost?
The franchise fee, sometimes known as the “starting franchise fee” is a one-time payment given by a franchisee to the franchisor in exchange for entering the franchise model, which is normally made when the Franchise Agreement is signed.
This is often a one-time payment rather than a percentage royalty, and it is employed by franchisors to compensate franchisee start-up expenditures, franchisee marketing, as well as other corporate overhead. The franchise cost can be anything over $500 and is usually in the $10,000 to $50,000 level, however, the most renowned franchises can cost significantly more.
The Franchise Fee is normally established by the franchisor at a level that allows them to pitch their offer to potential franchisees, pay incentives to franchise agents, and then provide them with the resources needed to provide early assistance to franchisees. This assistance often includes first franchise training, site approval and monitoring visits, initial advertising, and launch support.
How Much Does Licensing Cost?
A licensing agreement’s costs will differ depending on a number of variables, including the particular type that is required. There are four different kinds of licensing agreements, including trade secret, copyright, trademark, and patent license agreements.
Different types of intellectual property are covered by each of these license agreements, while some of the contracts will be more complicated than others. It’s typical for licensing agreements to stipulate the payment of royalties for the use of the resource. The licensor will assume payment if a business profits from its intellectual property. A licensing deal typically costs $711.90 according to research findings.
A license is fundamentally a formal authorization for an entity to make use of the property of another party. The property is typically an intellectual property kind like a patent, trade secret, copyrighted asset, or trademark. The licensor will get compensation from the licensee in return for using their property, either in the form of a royalty or a fee. The profit made by the licensee while utilizing the property is often used to determine how much royalty is due.
A licensing agreement can be used to permit the usage of a patented product, a logo, a song, or even computer software, to name just a few examples of properties that can be licensed. The licensee shall comply with all conditions and restrictions set forth in the licensing agreement in the use of the specific property.
Examples of a Licensing Opportunity
Brand licensing might be a useful tool if you’re seeking a quick way to raise brand awareness and sales prospects. Software trademarks, and perhaps even mascots or characters are now leased by brand owners to other businesses. This enables licensees to market the intellectual property or associated manufactured goods. Here we have some examples of companies that offer licensing agreements.
Everywhere you look, you’ll definitely see a Starbucks, though you might think most or some of these stores are franchised, you’re making a mistake.
Back in 2003, former Starbucks CEO Howard Schultz said, “It would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if we franchised.” In other words, Starbucks wants to preserve and maintain the quality of its coffee shop and service. They think that with the franchise model, consistency and quality might be lost.
Don’t despair, it’s still possible to open a Starbucks location that has been “licensed.” Remember that having a franchise is different from just licensing. It is comparable to renting a company’s name and likeness. Instead of a franchise fee, you’ll have to pay a license fee. Here’s a snapshot of how much you need to prepare when entering a license agreement with Starbucks.
Simply said, the definition of a liquid asset is having cash on hand. You have this much money available to you, which you can use immediately. A liquid asset is anything like cash in a savings account or stock holdings. Remember that even if you are not a franchisee, the investment is equivalent to that of similar ideas, such as McDonald’s, which costs between $1 and $2.2 is the average cost to acquire a franchise.
The Walt Disney Company
Through cutting-edge merchandise and interactive experiences offered all around the world, Disney Consumer Products, Games, and Publishing, a division of The Walt Disney Company, integrates iconic brands into the ordinary lives of millions of people and fans of all ages. Merchandise and retail experiences are distributed through a variety of channels, such as the shopDisney e-commerce platform as well as at Disney Parks, local and mass-market retailers, and Disney stores worldwide. The company’s iconic brands include Disney, Pixar, Star Wars, Marvel, ESPN, Twentieth Century, and National Geographic.
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As the biggest licensing company in the world, Disney Consumer Products, Games, and Publishing collaborates with top-notch merchandise in a variety of categories that resonate with their global customers with leading brands like Procter & Gamble, the LEGO Group, Jay Franco, Funko, Mattel, Mad Engine, Kimberly Clark, and Hasbro.
In contrast with Starbucks, Disney and perhaps other licensors establish their licensing on a percentage, often 5% to 15% of the entire retail sales of goods linked with their brands.
Examples of Franchising Opportunities
If you think that licensing is not for you, then franchising may be the better route for your business aspirations. There are a lot of companies that are involved in franchising, most of these are in the food & beverage industry and are world-renowned and established corporations. Here are some examples of companies that offer franchising opportunities.
H & R Block
The American tax preparation firm H&R Block has operations in Australia, the United States, and Canada. Brothers Henry W. and Richard Bloch launched the business in 1955. The company started to grow into the financial services industry in the 1990s, offering banking, business, and home loans. Olde Discount Stockbrokers was acquired by H&R Block in 1999, and under the name H&R Block Financial Advisors, the company ran as a full-service securities broker-dealer.
Currently, there are openings for brand-new H&R Block franchises along with the possibility to buy existing businesses from other owners. If potential franchisees need financial support, H&R Block does offer it in the form of a franchise equity line of credit. Here are a few of the financial conditions you must meet to open an H&R Block franchise.
|Total Investment||$31,557 to $157,898|
|Franchise fee (security deposit)||$2,500|
Unfortunately, H&R Block is entering the DIY Tax sector, which will negatively affect its franchised locations. As more people switch to a DIY online option as a result of the simplification of the tax code and technological advancements, the number of new consumers seeking the assistance of H&R Block Franchised Stores is decreasing. Additionally, if someone needs a more qualified tax counselor due to complicated personal circumstances, finding an H&R Block store would be challenging.
In 1965, Peter Buck and 17-year-old Fred DeLuca opened Subway in Bridgeport, Connecticut, originally as Pete’s Super Submarines. It had a number of name changes in the early years until being branded Subway in 1972. Its franchise operation started in 1974 with a second store in Wallingford, Connecticut. Since then, it has grown to become a global brand. Customers at Subway can select the toppings that go on their sandwiches from a variety of options. Eat Fresh, a recurring Subway catchphrase refers to the usage of fresh ingredients in their sandwiches.
As of June 2021, it had 37,540 stores throughout more than 100 nations and territories, making it the franchise with the fastest global expansion as of 2015. The United States is home to 21,796 of its locations or 58.1% of all of its locations. In addition, it is the world’s largest restaurant operator and chain with a single brand. Connecticut’s Milford is home to the organization’s global headquarters.
You can anticipate spending a total of $150,050 to $328,700. A net worth between $80,000 and $310,000 is required, in addition to a minimum of $40,000 in liquid capital. Liquid capital is the amount of money you’ll need on hand to sign the deal. Your total net worth is the sum of all of your assets, which would include cash, investments, or real estate. In order to assist you in getting started, Subway does require a franchise fee of $15,000. They also provide financing options through outside organizations.
To simplify, here’s a graphical table of the funds you’ll need to franchise a Subway store:
|Net Worth||$80,000 – $310,000|
|Total Investment||$150,050 – $328,700|