What is the difference between “franchising” and “licensing”?

If you are looking to grow – licensing products or franchising your business may be a consideration. In the context of channels to market, “franchising” and “licensing” could cause confusion, especially when both models involve one party granting the other party with specific rights in return for a fee.

The main differences between these two models are:

  • Under a franchise, the franchisee is permitted to use the franchisor’s existing brands and business methods subject to a fee. The franchisor maintains control over its brands and the franchisee’s business operation. The franchisee must operate within the requirements set out by the franchisor and it will appear to the word as the franchisor. The franchisor will provide the franchisee with necessary support, training and assistance during the term of the franchise.
  • Under the licensing mode, the licensor will grant a licensee with certain rights to use its intellectual property, products, services or business methods subject to a fee. The licensee is only allowed to use the licensed rights according to the licence terms, including following the licensor’s instructions on using its brand names and trademarks.

However, the licensee will operate under its own name with or without affiliate to the licensor (depending on the commercial arrangement). Contractually the licensee may have obligations to provide the licensor with reporting or be liable for breaching the licence terms, but generally the licensor will exert less control over the licensee’s business and operation.

If you are considering either of these options as a route to growth, make sure to seek advice as to the best option for your business and then be clear on the legal position.