The owner of every successful food truck is confronted with the decision to invest more capital and grow, or fall back on their success and stay a small business. With the risks and investments required to grow a food truck business, many vendors choose to stay small. Licensing and franchising are two ways food truck owners can rapidly grow their mobile food businesses while deferring many of the costs and risks to another party.
The differences between licensing and franchising are huge. To understand the difference between licensing and franchising we’ll look at what each term means.
Defining Licensing and Franchising
The essence of licensing is the vendor retaining ownership of its intellectual property (IP) while granting others the right to use it.
An example might be a food truck that has developed a successful menu item that another food truck owner is interested in selling off their menu. The only requirements might be that the licensee purchases specific ingredients and marketing items (boxes, bags, and cups with the licensor logo printed on them) through a designated distributor.
Whether you are licensing or franchising, the important thing is to protect your IP. Your food truck brand, know how, trademarks etc. are all precious assets, which should not be shared casually. The terms on which you grant licenses or franchises need to be carefully considered.
Franchising is a way to scale a food truck business once it has become successful. It involves finding franchisees with the skills necessary to operate trucks that run identically as the original business. McDonald’s is probably the best example of a food business that has grown through franchising.
Under a franchise, the vendor (franchisor) retains control of the food truck’s brand and licenses the franchisee to use its successful food truck business model and brand. In exchange, the franchisee puts up the initial capital for the business, helps to promote the brand and pays a license fee. The franchisor supports its franchisees by providing training to recreate the menu, know how on operational systems and marketing.
Licensing of intellectual property (a food truck’s menu and operational systems) is basis of a franchise contract. So, technically, a franchise includes licensing. Typically, this will cover recipes and other confidential operational information, trademarks, logos and designs, and copyright materials.
An essential element of a franchise relates to the formalities involved in setting up the franchise, and the degree of control the franchisor retains. A franchise agreement will usually give the franchisor the ability to control how the business is run.
Basic Differentiations Between Licensing and Franchising
A licensing agreement can be completed in as little as a week. Before offering a franchise however, a vendor must have standardized food production and operational systems, marketing and distribution. Franchising vendors must also complete extensive legal documentation and draft franchising agreements before becoming a franchisor. Franchisees are also subjected to a lengthy and thorough selection process. Franchising usually takes longer and costs more to set up than licensing.
Control & Support
In a licensing agreement, the licensor usually does not retain much control over how the licensee may operate. Unless otherwise specified, licensees can use the licensed property in whichever way they choose. Over the life of the agreement, which also tends to not last as long as a franchising relationship, licensees operate virtually independent from their licensors. Licensors in turn provide little if any support to licensees. Franchisors on the other hand, maintain significant control over how a franchisee operates. How its intellectual property is used and how its products and services are delivered is often determined by the franchisor.
Exclusivity and Competition
Licensors can sometimes license their intellectual property to two or more organizations operating in the same geographic region or market forcing licensees to compete directly with one another. Franchisees however, normally grant an exclusive territory in which to operate. When coupled with the site-selection assistance provided by the franchisor, limits direct competition between franchisees.
The Bottom Line
Franchising is extremely expensive. Because of this, licensing can be a great way to start if you are interested in franchising your food truck business. Rather than diving straight into franchising with all the due diligence and formalities that it entails, you could start by finding a few licensees who are willing to license some or all of your food truck business.