The Difference Between Franchising and Licensing

Franchising and licensing are two methods of profiting from the valuable goodwill of your business. While both methods have similarities, distinct differences further characterize their legal and business meanings.

This article gives important context to distinguish the difference between the two options. Here, you’ll also read about some key considerations for choosing which method might be best for your business’ development.

All Franchising Is Licensing, But Not All Licensing Is Franchising

Franchising is when you sell the use of your business model to third parties who become franchisees. In exchange for a fee, the franchisees receive training on business operations and a license to use the business’ intellectual property.

You create terms under a franchise agreement that includes restrictions and obligations for how the franchisee must operate and use the business brand.  Franchising also involves greater regulatory compliance and oversight to avoid certain liability (e.g., franchise disclosure documents and the Franchise Rule).

Differentiating Licensing from Franchising

Franchising includes the licensing of a business’ brand but requires a stronger relationship between the parties than a standard licensing agreement. The reason is that you are replicating everything about a business. With a licensing deal, however, you may control how a licensee uses your intellectual property, but you won’t control other aspects of the licensee’s business – especially if it’s unrelated to your branding.

Should You License or Franchise Your Brand?

Choosing between these two methods will depend on a few factors (i.e., your goals and the nature of your business). For example, franchising requires far more work than licensing because of the additional operational training you give the franchisee. A license agreement can be seen as a more passive arrangement as you only control how the licensee uses various trademarks and copyrights.

The specifics of your business are also relevant in deciding between licensing and franchising. If you have a product or service model that others can replicate in new territories, then franchising might be the appropriate route. Alternatively, businesses that are not easily reproduced (e.g., entertainment, sports teams, etc.) might be better candidates for licensing deals.

Licensing also makes more sense if you want to pair your brand with other successful products and industries. For example, you can allow the use of your trademark on clothing, apparel, and other merchandise that you have no interest in producing independently. This lets you capture market share without worrying about the logistics and expense of additional operations.

Contact Us for Legal Help with Licensing or Franchising Deals

While licensing and franchising have some overlap, they serve different purposes and have distinct legal requirements. Both deal structures offer an effective path to grow a business and increase revenue streams. Working with legal counsel and other operation partners is important when deciding which method will work best with your business.

The attorneys at Franchise & Business Law Group can help you consider the merits of each option and draft the necessary agreements. We aim to be a trusted representative that can guide you in creating and maintaining successful relationships in franchising or licensing.

Schedule a consultation with Franchise & Business Law Group today.