When trying to expand or leverage your successful business to further growth two models that are commonly used are franchising and licensing. While they may mistakenly be used interchangeably they are two distinct concepts and this article will discuss their differences to assist you in deciding between franchising vs. licensing.

Franchising

In a franchising model you are selling another individual or company the right to use your business model and business name to essentially operate as an independent location of your company. With franchising you still retain a great deal of control over the actual operations of the other location and in many cases they have to share some costs with you. These costs may relate to branding and marketing of the business as a whole, which you still manage yourself but for which all franchises would benefit.

Franchise owners typically provide territorial rights to franchisees, allowing them to control a certain area, which also ensures that new franchises can't cut in on an already existing franchises business. Examples of franchises in the U.S. would include Burger King, Subway, and Chipotle.

It is important to note that franchises are governed by securities laws and any arrangement that is technically a franchise arrangement (even if it's legally worded differently) will fall under these laws. There have been instances in the past where companies have issues agreements labelled as licensing agreements but they have been later deemed to be franchises.

Licensing

In a licensing model you are selling the right to use your intellectual property (IP), brand, or business processes to another party. Licenses do not typical come with restriction in terms of providing a territory or a market for the exclusive use of the licensee. Additionally you do not retain control over the licensee once you have sold the right to use your IP or brand, though limits can be in place over how they use it specifically. Examples of licensed products include Microsoft Office and sports teams giving merchandise sellers a license to use their brand.
Licensing arrangements are governed by standard contract law so there are less administrative burdens than in a franchising arrangement.

Franchising vs. Licensing

When considering which model will work best for your business you need to consider the nature of your business and what degree of control you need over your IP or brand when it is used by others. In assessing this you need to consider if someone else using your IP or product in a manner you would not approve would impact your business. For a company like Burger King ensuring rigid control and consistency among locations is important, but if you're selling software it's less important that you control the use of the users.

Both arrangements can generate significant revenues through the royalties and cost sharing that can occur. That is why so many businesses approach use these models as otherwise it would be difficult to expand and grow the business out of internal cash and resources alone.