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What’s The Difference Between Licensing And Franchising?


November 30, 2018
What’s The Difference Between Licensing And Franchising?

In the range of life goals you have, working for yourself may be top of the list. More than that, in fact – working from an established profit model, under the direction of a brand you’ve come to know and appreciate. Every year, thousands of people explore a franchising agreement for this very reason.

However, there’s a point of confusion. It crops up again and again for soon-to-be entrepreneurs: what are the differences between licensing and franchising agreements?

It’s a critical question, because one can quite easily be mistaken for the other. In reality though, there’s a number of differences that separate them. Learn all about the distinction below…

A franchising agreement

When you’re in a franchise contract, you adhere to the guidelines of what you can and can’t do with the business. The parent brand will pass on its skills, tactics and values, which you must uphold. They will also let you use official, patented tools and marketing materials. You get the name, the training and the secrets of their service model. You’ll cover each of these during a period of training (usually a boot camp), and they may also be outlined in the document you’ll sign to complete the investment.

Marketing will often be taken care of on a national or regional level. Flyers, posters, online ads, social media, email campaigns and the business’ website may also be the responsibility of the franchisor. Aside from that, you’re allowed to network and make your own connections. All of this will also be detailed in the contract, alongside stipulations for what you must do in order to maintain the franchise terms.

This last element is crucial. Franchisees are largely free to run the business as they like, yet there are conditions. From operational procedures to the way in which the service is tendered, you’ll have to meet certain rules as an extension of their brand.

A licensing agreement

On the other side of the argument, we have licensing: something that grants far less certainty over the ‘dos and don’ts’.

Any business owner can license their intellectual property. They retain ownership, but you’re able to use it too. An example might be a burger recipe, or an industrial process, or even just the name of the brand – anything that’s patented. Like in a franchise agreement, you pay a fee in order to be granted permission to make money from the use of them.

The original owner is usually much less involved than a franchisor. They can specify how you’re meant to use a registered trademark – for example, where a brand logo can or can’t be used – but they’re very much hands-off. All you’re getting is the element you paid for, but none of the support. And, sometimes, the terms of the purchase aren’t clear.

Franchisor vs. licensing agreement: what’s best?

There are advantages and some drawbacks to both agreements. Let’s compare the two…

Franchising

Pros:

  •  It includes licensing as part of the agreement
  •  You get full, continuous guidance and training over your tenure
  •  Most marketing responsibility lies with the franchisor
  •  The terms of activity are outlined so you know what is expected of you

Cons:

  • The start-up fee may be high, although this fluctuates
  • You must construct a business plan before anything is agreed

Licensing

Pros:

  •  A product or service is yours to begin earning from
  •  There are no capital investments in the beginning; all you have to do is pay the fee
  •  The business is devoid of performance criteria

Cons:

  • You’re on your own, without professional advice and best practices as guidance
  •  It’s possible to overstep terms without realising, making your agreement void
  •  Marketing will be down to you, which drains more funds over time

Ultimately, it’s probably a better move to go for a franchising model. With licensing, you’re only getting the IP, which doesn’t bode well for a business that has its eyes on something bigger in the future. You may be freer, but it won’t pay off in terms of a profit.

A franchising agreement, however, wraps licensing in a package along with other valuable benefits. You get the wisdom. You get the experience. Moreover, there’s a set way of doing things that’s specifically designed to increase your chances of success.

Now that you can draw a line between these two terms, it’s time to choose the right one. Speak to Rainbow International’s recruitment team for more information on running a specialist cleaning and restoration franchise business.

 

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