Licensing and franchising are two types of agreement that are kind of similar and thus arise confusion in mind. Both are legit and safe agreements. If you are thinking of trying your hand in any, then you need to have a clear idea of the two.
Licensing vs Franchising
The main difference between licensing and franchising is that licensing is a contract based agreement, whereas franchising falls under security laws. In franchising, even though the franchisee buys a property, he/she does not possess much power over it. The franchiser controls the tactics and techniques of the business. But licensing does not offer licensors that much control over the business of the licensees.
Licensing is a type of lease that helps to extend goods and products without touching or affecting the brand value. Licensing is a contract that is done in exchange for money which is widely known as royalty. The licensor does not have much control over the business. It is very common in the manufacturing industry.
Franchising is an agreement that can help to extend the business of the franchiser. It does not face the limitations of geographical diversity. This way, the franchiser can spread the business without affecting the fame of the brand. This agreement includes money as well. The franchisees get trained to hold the perfect brand value.
Comparison Table Between Licensing and Franchising
| Parameters of Comparison | Licensing | Franchising |
| Meaning | This is a contractual agreement in which one firm gets access to another firm’s patent, technology and other things in exchange for money. | In franchise, a franchiser sells a property to the franchisee but controls over the procedures of the business. |
| Governed by | Contract law governs licensing. | Securities law govern franchising. |
| Registration | Licensing does not require registration. | Franchising requires registration. |
| Power to control | Licensors possess no control over licensees. | Franchisers have control over franchisees. |
| Example | Microsoft Office | Subway, MacDonald |
What is Licensing?
Licensing is a kind of agreement according to which the licensee can get access to the patent and technology of the licensor in exchange for some money. The money given in this process is called royalty. For example, we can say that when a creator creates something unique, we often see its merchandise getting viral. So the people who produce these merchandises take a license from the creator and use the designs and the characters.
The licensee always stays under the regulation of the licensor. The licensee must follow the terms and conditions prescribed in the agreement in order to use the licensed product legally. However, the licensor does not have any power to regulate the business.
The licensing agreement comprises a one-time fee for the transfer of rights or property. Licensing does not include any support from the licensor. Licensing is done mainly for products and goods. Licensor does not require to make any heavy capital investment.
What is Franchising?
Franchising is an agreement according to which the franchisee gets to use the trademark and logo of the franchiser’s business. Brands like Macdonald, Pizza Hut, Dominos, etc., have many outlets to offer to customers scattered over the whole world. All the mentioned brands have their trademark and signature dishes. The reputation of the franchiser gets enjoyed by all the franchisees.
These huge brand names do not prefer licensing over franchises. This is due to the reason that under licensing, the licensor can not control the business once the agreement takes place. But in the franchising agreement, the franchiser can supervise the business during the agreement. This way, the franchisee can not harm the brand name and prestige by doing anything against the principle of the brand.
According to the agreement of franchising, the franchisee can not compromise with the quality and service of the patent brand name. All the technicalities, know-how skills are available for the franchisee to follow once the franchising gets implanted. The management fees get included in the agreement.
Franchisors can enjoy the benefits of franchising as this way they get access to the diverse marketplace without the boundary of geography, and they do not even need to compromise on brand value with this agreement. The franchisee receives continuous support and training from the franchisor.
Main Differences Between Licensing and Franchising
- Licensing is a contract that allows the licensee to use the patents and technologies that belong to the licensor, whereas franchising is an agreement that includes selling a property, and the franchisers have full control over the business processes.
- Agreement of licensing gets governed by contract law, whereas franchising gets governed by the stricter securities law.
- Licensors possess no control over licensees, but according to franchising, the franchiser has control over franchisees, and they are entitled to govern the franchisee’s business.
- Licensee does not get any sort of support in the course of business, but a franchisee gets guided, trained and instructed throughout the agreement.
- Registration is not a requirement in the case of licensing, but registration plays an important role in franchising.
- The money given in the licensing is called royalty, and the money that gets involved in the franchising is called management fees.
Conclusion
Licensing can be said to be a subsection of franchising. The pact of franchising will comprise numerous licensing agreements before transferring the right of using intellectual properties. Franchising is a vast agreement than mere licensing. Both the business models help in the expansion of a brand in different ways.
One agreement can not be underlined as better than the other as both serve different purposes. The nature of the service or product decides the best-suited agreement. A solid foundation prepares both agreements, so both are safe and fully legit. Both share similar advantages, and both have some limitations.
Franchising will help to expand the business, avoiding the boundary of geographical space, while licensing can help to use the patent and technology of the licensor without any interference.
References
- http://nopr.niscair.res.in/handle/123456789/6058
- https://books.google.com/books?hl=en&lr=&id=2jh4EyC0M_wC&oi=fnd&pg=PR7&dq=licensing+and+franchising&ots=gC-tcm5EaO&sig=PPc_DYOWj-rEsAp6zEOKSfNk31M