Eyes Wide Open - Is It a Franchise or a License?
There’s a difference between a franchise agreement and a license agreement, but the two are often confused. So let’s have a look at both licensing agreements and franchise agreements to figure out the differences and which option will be best for you.
1. A Licensing Agreement
A licensing agreement will basically give you the right to use someone’s intellectual property. This intellectual property could constitute of patents, trademarks, copyrights, designs or trade secrets. For example, you may license the right to play someone’s song on your radio station, or do coaching under their umbrella, using their coaching system.
A licensing agreement will last for a certain amount of time and may vary with each and every agreement made. Generally the agreements are for shorter periods of time though, at least in comparison to franchise agreements.
2. A Franchise Agreement
A franchise agreement is a licensing agreement as it’s a license to do business in a certain way, but it must have specific traits to be considered a franchise agreement. There are different legal requirements for franchises depending on your location, but in basic terms a franchise is a license issued to a person to operate a business using a common brand name, a common operating support system and it involves the payment of initial and/or recurring fees.
What this normally means is that in addition to getting the right to sell someone’s products, you also get their entire business model, including systems and operations, staff training, marketing, suppliers and sometimes even distribution. It makes it easier if you are just setting up a business as it ensures you have all the necessary information and support to succeed. On the down side, it means you cannot run the business as you see fit. You have to follow the procedures as laid out to you.
3. Independence v.s. Support
A licensing agreement usually gives you the right to use the intellectual property as you wish, so long as it’s legal. You can sell it however you like, using whatever business model you find suitable. How you market it is up to you, too.
If you have signed a franchising agreement on the other hand, there will be rules and regulations for how you operate the business. There will be existing operational systems put in place, staff training is often given, as are staff manuals and you may have to follow price guidelines for the products or services being sold. The upside of this is that there is always support available - from help with site selection for the business to all kinds of different training and marketing initiatives. Often there are larger marketing campaigns done by the franchisor, using money from the fees the franchisees are paying, but they may also help you put together smaller marketing campaigns for the local area.
4. Exclusivity and Competition
When it comes to franchising you are often granted an exclusive territory in which to operate. This limits you to that territory, but it also means there will be no competition there. When it comes to larger chains, such as popular coffee shops, this territory could be as small as a block in a city, but it could also be an entire city. It depends on what kind of product will be sold. Whilst there might be demand for two coffee shots in adjacent blocks, there may not be demand for two hardware stores. The franchisor should be aware of these things and allot a territory that’s of fair size. Also, franchisors often help with site selection to try to ensure you get the best location possible to maximize profit.
Licensors on the other hand license their intellectual property to whomever they choose. They don’t care if you have a competition next door. In fact, it might even make their product more successful if two people are trying to outdo each other, even if it means one of them will eventually have to move. This gives you freedom to move the business wherever you like, but it also means you may be competing with others who offer the same products and services you do.
5. Should You Choose Franchising or Licensing?
Whether to close franchising or licensing depends on your needs as a business owner. If you want to set your own rules in everything you do, franchising might not be for you. If, on the other hand, you feel you want as much support as possible, then franchising is a brilliant opportunity.
6. Know What You sign
An important thing when considering a licensing or franchise agreement is to fully understand the terms and conditions laid out. Chances are you will need an attorney to help you with this.