Licensing v franchising. Patrick Burge says, “I’m a fan of licensing, especially if it’s franchising!”
I am frequently asked by clients ‘should we franchise or license our business’? It is a surprisingly difficult, and sometimes nuanced, question to answer. I’m a fan of licensing, especially if it’s franchising. I also love licensing in its own right. But most of all I love it when a client takes the right growth option for them.
I think most people in business would know that McDonalds and Subway are franchised businesses, and that if I buy a Disney item in a store it is most likely that it was manufactured sold under license, not manufactured by Disney. Simple huh?
So a franchise business model obviously works for a retail format where everything in the environment is under one brand name right? And licensing is for a product that has a brand or logo on it. End of.
Here’s some pointers about licensing v franchising.
Well sort of, but not really. So here’s the difference between the two.
In a franchising model, the franchisee uses another company or brand’s business model and brand name to operate as a replica or carbon copy of that business. You are effectively acting like the franchisor’s business and no one else’s business, in your territory; whether that is a physical geographic territory, or the territory is based on another non geographic criteria.
Under a licensing model, a company, the licensor, sells licenses to other companies, called licensees, to manufacture or use the brand, or business programmes, often on a non-exclusive basis; so licenses can be sold or awarded to multiple competing companies serving the same market. The licensee also nearly always has the right to have other competing or non-competing license arrangements with other licensors. You often find that a franchise has the franchisor’s proverbial name over their door, whereas a licensor does not.
One fundamental difference therefore is that whereby a licensing company may exercise control over how its brand is used it does not control the business operations or the behaviour of the licensee in any way; but a franchisor does.
It might be useful to look at the limitations of each business model, what types of business might be more appropriate for the brand owner to license or franchise, control, support and legal constraints.
A license can often be put in place quicker than a franchise, but the brand owner does not exert as much control over the licensee and how he represents the brand as a franchisor does.
A license is typically a single revenue stream, as in there is a simple payment per product sold or service delivered. A franchisor typically has more than one revenue stream from a franchisee, but it probably takes more time and effort to set the franchise operation up than a licensing operation.
A franchisor maintains a considerable degree of control over the operations and processes used by the franchisee, but is also obligated to help with things like branding and marketing support that aid the franchise. The franchiser also typically has control and policing responsibilities to ensure that franchise branches do not cannibalize each other’s revenues.
Franchisor has the benefit of an immediate revenue stream from the franchisee in the form of a franchise fee, but a license is typically a drip feed of percentages on sales.
There are many other areas that one could compare but as a company that is more often involved with franchising than licensing, we see one of the fundamental benefits of franchising as one of control and value.
As one of my colleagues says, “with licensing the licensee is growing his business, with franchising the franchisee is growing his business, your business, your balance sheet and your exit value”.
We are working with a wide range of businesses in franchising at the moment; from retail, food service, hospitality and B2B service businesses that are traditionally franchised, to pure tech businesses and others that you would not automatically think of as potential franchised business models. We always consider licensing v franchising with every new brand.
We talk about business growth all the time and it is very hard to be definitive about what growth model is best for you. Licensing, franchising, organic, acquisition, distributor; there are so many options and it is worth investigating what suits you best with someone who knows.
I would say that if business strategy is to expand, do not discount franchising as a business model just because it is not the obvious option. If a brand owner can find, buy in, or develop the necessary resources to set up and support a franchise network as it develops, I would say look there first. It may not be simpler, and it may not ultimately be for you, but it might also mean a more capitalised growth, a more valuable business as exit and a more controlled brand.
About the Author: Patrick Burge is a specialist in business growth having helped build online and offline businesses in many sectors including tech startups, apparel, sport, fitness, health, printing, retail, coaching and consulting. Apart from specialising in the brand licensing and franchising, he has also advised numerous businesses on getting their strategy and funding in place as an advisor and Delivery Partner CEO on The Government Startup Loan Scheme. He can be contacted at firstname.lastname@example.org