Licensing Versus Franchising

For a business looking to grow, the option of franchising or licensing can be very appealing. Indeed, both can offer a route to successful expansion, as an alternative to organic growth, and with lower risk than. But business owners are seldom given much advice on the difference between the two, and can often find themselves steered in the direction of one, without a strong understanding of whether the other might have worked better.

So if you are thinking about either licensing or franchising for your business, here is a quick guide to the differences between the two, and some pro’s and con’s of each.

Franchising

Most of the time, when people talk about “franchising” they mean business format franchising. A franchisor – being a business with a strong brand, and a well-established and profitable business model – looks to replicate that model by “franchising” it to other people – “franchisees”.

It is, of course, franchising that has brought the likes of MacDonalds, Starbucks, Mail Boxes Etc., ServiceMaster, and hundreds of other brands, their International reach and huge success.

The advantages are well-known: The franchisor gets an income from the franchisees for the use of the brand, and the franchisees buy in to an already proven and successful business concept. New start-up franchises have a much lower failure rate than other start-up businesses. Moreover, the franchise arrangements extend the use and reputation of the brand to a wider geographic area and a bigger audience, to the benefit of both the franchisor and the franchisees.

Does this mean that franchising produces a win-win for everyone? Sometimes, yes. But not always. Franchising is not the perfect solution for every business, and it isn’t easy.

As a potential franchisor, you soon realise that there are more franchise opportunities on offer, than there are potential franchisees wanting to take them on. So you will want your franchise offer to be as attractive, or even more attractive, than those of your competitors. Your franchisee is paying you to deliver them a complete business format, and in order to achieve a consistent customer experience, you will want your franchisees to replicate this format exactly.

A franchise concept is unlikely to thrive unless you first have a business model with a proven track-record of profitability. In getting your franchise offering off the ground, you are likely to have invested time, effort and money in:

• A business analysis, with a franchise model and pro-forma financials
• A “pilot” (or test) franchise operation
• An attractive and compelling Franchise Prospectus (to market your franchise offering to potential franchisees)
• A detailed Operations Manual and training programme
• A marketing strategy – for attracting franchisees as well as for underpinning awareness of your brand
• A tailor-made franchise agreement, designed around your particular business and properly protecting your rights.

It is no surprise therefore that successful franchisors will often have spent upwards of £30,000 to launch a franchise business model, and sometimes considerably more.

When is Licensing a good alternative to Franchising?

The two concepts are similar. In a licence agreement, there is a business owner – the “Licensor” – who grants others – “Licensees” – the right to use the Licensor’s brand name and/or other intellectual property rights (such as copyrights). As with a franchise, the licensee’s business benefits from the brand and intellectual property of the licensor, and the licensee pays fees to the licensor accordingly.

They important difference is that a licence arrangement tends not to involve the replication of an existing business format. In many cases, the intention is the exact opposite, with the licensor licensing their brand to a third party who will be able to exploit it in a consumer sector in which the licensor has no presence or expertise. The perfume industry is a good illustration – the majority of all the big name fragrances are in fact made and sold by just two or three big perfume houses. “Calvin Klein”, “Cerruti”, “Vera Wang”, “Chloe” and “Lagerfeld”, for example, are all are manufactured and distributed by Coty under licence from the brand owners. And the revenues that the likes of Disney, Warner Brothers and BBC Worldwide derive from merchandise licensing in many cases exceed the profits from the relevant film or TV rights.

Licensing also works well where the licensor has developed some specific technology, know-how, brand images or designs, which are attractive to licensees who wish to incorporate it into their existing businesses. Take software and database technology, for example, which are invariably exploited through licensing.

On the other hand, coaching and training concepts have been shown to work well either as franchised businesses or licences. Action Coach, Pitmans Training and the Infinite Group are examples of successful franchised operations. There are also a number of businesses who have developed unique coaching and personal development tools that are exploited beneficially through licences to training establishments who incorporate those tools into their own business structures.

A licence can be easier to manage than a franchise. The licensee has more freedom to run their business their own way. As a general rule, therefore, a licence arrangement is cheaper and easier to set up than a franchise concept, and less demanding in terms of ongoing management time.

But a licence agreement has to focus very carefully on quality assurance and compliance with the licensor’s standards. Products or services sold under licence should enhance and complement the reputation of the licensor, and the licence agreement must allow the licensor to “pull the plug” whenever quality or compliance are compromised. Before granting any licence, the business owner will need to have a very clear idea of how in practical terms they will monitor quality.