Franchise Or License: What to Choose?

If you are an inexperienced entrepreneur, franchising will be a better option for you. This is because you will not only get operational training, but also managerial support from your parent company.

There has been a debate among entrepreneurs whether to opt for franchising or licensing. One of the key benefits of opting for franchising is that you will have a proven and workable business model, which you can implement for the success of your business.

However, licensing may not help you like this. For example, if you want to start a Starbucks outlet and are franchising with them, you will have a ready business operational model, and you will not have to start right from scratch.

However, things will not be so easy with licensing. Also, you will receive guidance, support, and training from the parent company of the franchise, which will be absent in case of a license. As lesser formalities are involved in opting for licensing, it is comparatively cost-effective and quick to set up.

You will have to pay royalty to the franchise from time to time, which may not be the case in licensing. Here are a few points that elaborate the difference between franchising and licensing.

With franchising, you will not be just getting a license for a product or idea, but rather duplicating an entire business. You will have to work within the guidelines and restrictions of the parent company. This means you will have to maintain uniformity in every aspect of the business.

The parent company or the licensor will give a license to the licensee to use its intellectual property. This can be anything from a product, technology, music, business idea, brand name, logo, etc. It will be used by the licensee for selling or manufacturing his goods.

■ It is regulated by Securities law.

■ It is ruled by Contract law.

■ An exclusive area is allotted to the franchisee, discouraging direct competition between two parties.

■ Licenses can be given to two parties in the same geographic area, which leads to competition.

■ Franchiser will dictate how he wants the franchisee to implement the intellectual property.

■ After getting the license, the licensee can use the intellectual property in any way he deems appropriate.

■ Registration is mandatory.

■ Registration is not required.

■ Franchisers exercise control over every aspect of business including price setting, branding, marketing, advertising, etc.

■ Once the agreement is signed, the licensor will not bother to interfere with the licensee's business.

■ The relationship lasts longer and remains stronger than a licensee and licensor's agreement.

■ The two parties enter into a business relationship for a comparatively shorter duration.

■ The franchiser actively supports the franchisee by providing training, location hunting, operational know-how, etc.

■ No support is given by the licensor after the agreement has been signed.

■ A franchiser cannot manage the business independently without the franchiser.

■ The licensee gets to steer the business and take business decisions on his own.

■ It takes a long time (anywhere between 6 months to a year) to complete the legal formalities because of the clauses involved.

■ Agreement drafting and signing does not take much time, and your business can kick-start in a matter of few weeks.

■ It follows strict internal and external standardization throughout all the franchises.

■ There is no standardization, and two licensees can operate the business in any way they like.

■ The investment cost and franchising fees can be extremely expensive.

■ Upfront investment is relatively cheaper to set up the business.

■ The amount of ongoing fee owed to the franchiser is on the higher side.

■ The ongoing fee is on the lower side.

■ McDonald's, KFC, Dunkin' Donuts

■ Microsoft Office

■ A franchise has uniformity in communication, branding, décor, etc.

■ There may be no uniformity as separate businesses may get the license.

■ As the state and federal authorities and SEC regulate it rigorously, you have to comply with the filings, disclosures, and offerings from time to time.

■ You are not obliged to undertake such filings or disclosures in this case.

■ As everything is standardized and uniform, brand image and reputation of the parent company may not get affected.

■ Brand image and reputation of the parent company may get affected due to mixed messaging and disparity.

■ It needs to comply with the Franchise law.

■ It is governed by Contract law.

■ Franchisee has a right to the logo and trademark of the franchiser.

■ A licensee does not hold the rights to the logo and trademark of the license issuing company.

■ It is a long-term partnership, which ends when the franchiser or the franchisee wants to end the agreement.

■ The contract is for a limited duration and is subject to renewal from time to time.

■ You will implement a workable tried and tested model, and this will work in your favor.

■ You cannot use anything except the attribute for which you own the license, and you will have to experiment in your business.

Opting for a franchise calls for more initial capital investment, but it also comes with a plethora of benefits as compared to licensing. Hence, now that you know about the distinction between the two, choose your option wisely.

Instead of deciding whether licensing or franchise will work for you, understand which will be the best way to implement your business strategy. Depending on your budget, urgency to start the business, and autonomy involved, you can opt for any one of the mentioned options. However, don't forget to solicit legal help before you initiate your venture.