There are several misleading differences between franchising and licensing. The main difference is that by a franchise agreement, the franchisee is entitled to use the franchisor’s trademark and operate in compliance with brand standards, but by entering into a license agreement, the licensee only has the right to use the licensor’s trademark and won’t learn about its standards and know-how.
Since these two terms may seem a bit alike, for avoiding any confusion, first we should define franchise agreements and then turn them into their differences.
What Is a License?
As defined by the Legal Information Institute; “a license is a permission granted by a qualified authority permitting a licensee to do something that would otherwise be prohibited.” By entering into a license agreement, the licensee will be entitled to use or benefit from a trademark, technology, or other legal rights, for example, a drug company may grant another company the right to use its patented formula for manufacturing that drug.
The license agreement will restrict what the licensee can and cannot do with the licensed asset, but as opposed to the franchise agreement, it does not allow the licensor to exert control over the overall operations of the licensee’s business.
A famous example of licensing agreement was the one between Nestle and Starbucks; In May 2018, Nestle (the licensee) agreed to pay $7.15 billion in cash to Starbucks (the licensor) for exclusive rights to sell Starbucks’ products (single-serve coffee, teas, bagged beans, etc.).
What Is a Franchise?
Franchise agreements are basically means of expanding one’s business in other locations. By concluding this agreement, the franchisee is entitled to operate a business, or offer, sell, distribute goods or services identified or associated with the franchisor’s trademark. The franchisee is also obliged to follow certain standards or qualities determined by the franchisor.
For more detailed information about franchise agreements you can go to the link below:
What Are the Differences between Licensing and Franchising?
By entering into a franchise agreement, you allow the franchisor to control your business. But there’s no such thing as licensing. The franchisor can exert a large amount of control over the franchisee’s business such as its location, standards, and way of operation. This is because the franchisee’s business is basically an extension of franchisors.
But it’s not the same in the licensing agreement. The licensor can only set limitations for the use of a given trademark, technology, or formula. But it can not exert control over the licensee’s overall business. For example, it can not define the licensee’s general policy or decide how its business should be run.
2. Legal Regulations
Generally, there are more requirements in order to conclude a valid franchise agreement. While this is not the same in licensing agreements.
For both of them, the general contract law is followed but for example in the United States, there are specific federal regulations for franchises at the federal level and some additional requirements at the state level. You can find more about the details of franchise agreements in the United States by taking a look at the franchise rules.
So Contract Law governs licensing while franchising is regulated by franchising regulations in many countries, but in case the franchising regulations are not in place then the company law regulates.
As mentioned above, the license agreement is basically a transfer of the right to use, make and sell an idea, design, name, or logo. Whereas a franchise agreement allows the franchisee to operate a business as an independent branch of a company.
So in order to perform a franchise agreement, the ongoing assistance of the franchisor is required, to make sure that its branch is operating in compliance with its standards. While in a license agreement, the licensor has no other obligation than the one-time transfer of property or rights.
License agreements are cheaper than franchises. As mentioned in the previous article there are several types of fees that should be paid to the franchisor. These fees include franchise fee, royalty fee, advertising fund and/or brand fund fee, and market introduction program costs. But we don’t face the same payments in licensing. So if you’re a bit low on financial sources, licensing is the economic option for you.
Advantages and Disadvantages
|Control||The franchisor can exert control over the franchisee’s business||Licensor has no control over licensee’s business|
|Legal Regulations||Franchise agreements are based on general contract law plus franchise regulation of each jurisdiction||Licensing agreements are only based on general contract law|
|Process||The ongoing assistance of the franchisor is required||The licensor’s obligation is only a one-time transfer of right|
|Payments||Includes several types of payments||Only one kind of payment|
Which One Should You Choose: Franchise or Licensing?
The answer to this question depends on your goals and your needs; If you’re planning on expanding your business OR if you want to follow the success story of another well-known company, entering into a franchise agreement would be the right choice for you.
On the other hand, if you want your business to be completely independent and all you need to gain more profit is a logo or maybe a formula, then probably you need to conclude a license agreement.
Also answering a few questions would be quite helpful in order to find out which way to go:
- Do you want to keep your operation independente while using the reputation of another company?
- Are you looking for a quick and easy way without regulatory requirements to improve your business?
- Is there an idol business in your mind which method you want to follow?
Still, entering into a legally binding relationship needs a detailed elaboration of your circumstances. So whether you want to conclude a franchise agreement or a license agreement, and generally any contract, never forget to consult with a professional lawyer in that area.