Licence VS franchise agreement: What is a licence, Benefits to licensor, Benefits to the licensee; What is a franchise agreement, What is better; A licence or franchise agreement, examples,What works better.
A licence and franchise agreements are similar in many aspects, but there is a fine line of difference between these two. To see these fine lines, one must be aware of their meanings. This difference allows business owners to make the right decision for their business.
Whether you want to expand your business or you are thinking about starting your own business with pre-recognized brands, you need to understand franchise and licence agreements to know what better suits your business goals.
licence and franchise are agreements that; deal with the transfer of certain brand aspects between two parties for consideration.
People get confused between licence and franchise agreements due to their similarities. In this article, we will unfold differences and analyse; which suits your business goals better.
What is a licence:
A licence creates a legal relationship between two parties, the licensor and the licence.
- The ultimate owner of the intellectual property who grants certain rights to the other party; is called a licensor.
- The person who acquired the rights in exchange for consideration is called a licence.
The Licensor grants access to certain rights to use or sell its intellectual property in return for royalty fees to the licence.
In licence, ownership over the intellectual property remains with the licensor; only certain rights go to the licensee. The licensee has to pay upfront fees or royalty fees to acquire the rights over intellectual property.
In a nutshell, a Licence is acquiring certain rights to use or sell the product or goods of the licensor in exchange for consideration. Everyone has likely heard the names of familiar brands Microsoft, Disney, and Starbuck. These brands are the best examples of licensing agreements.
In licensing agreement, the licensee acquires the right to use the brand name, patented technology, manufacturing, and selling. The sole purpose of these agreements is to commercialise and market products.
How it is beneficial for licensor and licensee, let’s find the answer.
Benefits to licensor:
- The licensor can expand its reach through the licensee distributor network in a new geographical area.
- Brand recognition and commercialization.
- The licensor can earn passive revenue as royalty fees without transferring the ownership rights.
Benefits to the licensee:
- Pre-recognized and established brand names can help to get access to the market.
- Producing a new product and increasing sales is a daunting task as you do not have the required knowledge and skills. A readymade product with a recognized brand name lifts your business from the ground.
- Get access to a firm customer base of the pre-recognized brand.
What is a franchise agreement:
A franchise is an agreement between two parties where one party(franchisor); allows the other party (franchise holder) to operate their business on the name, brand, business model, and trademark of the franchisor in exchange for royalty fees.
Franchisees use the pre-recognized brand name and business model to operate their business as an independent branch.
Entering a franchisor agreement is not the end. The franchisor watches and controls all the ongoing operations of the business.
In a franchise agreement, the franchise holder remains the ultimate owner of the business but operates its business under the control and supervision of the franchisor. Franchisors also provide support and assistance in promoting, marketing, training, and setting up the business. The franchisor ensures end-to-end support in setting business for the franchisee.
In a nutshell, the franchisee operates its business on the franchisor’s brand name in exchange for consideration.
Benefits of franchising agreement:
Franchising agreements provide several benefits to franchisor and franchisee both. Let us discuss some of these benefits.
Benefits of franchisor:
- Expand your reach in a new geographical area.
- You can control the ongoing operations of the franchisee and supervise according to your set of rules.
- Establish your business in a new location without compromising the quality and brand image.
Benefits of franchisee:
- The franchise remains the ultimate owner of the business.
- Get access to the firm customer base of the franchising company.
- Franchisees do not need to worry about marketing and sales; the franchising company will provide the support, assistance, and training for setting up the business and marketing.
- Pre-established brand recognition helps to survive in the market.
What is better; A licence or franchise agreement:
Whether you should go for a licence or franchise agreement is a confusing and daunting task. To find which is better for your business, you should first know the difference between these two. Here are some differences between licence and franchise agreements.
- Business model: Licence deals with the products and goods like software, technology, etc. On the other hand, franchises deal with services like food chains, automobile chains, pharmacy chains, etc.
- Ownership: In the licence, the licensee can not enjoy the ownership rights over the property, but in the franchise agreement, the franchise holder enjoys full ownership right in business.
- Applicable law: The agreement of licence comes under the purview of contract law; on the other hand, company laws and federal laws govern franchising agreements.
- Control: Licensor has no control over the business operations of licensee whereas franchisee operates by the standard set by the franchisor.
- Support: the licensor does not provide any support and assistance, while the franchisor gives guidance, training, and support; in setting up the business and marketing.
To find the better analyse your business needs and goals first. Ask yourself a few things before concluding.
- Do you need support, assistance, and training to establish your business?
- How much control over the operations do you want to retain?
- Consider your budget and cost.
- Read companies prospectus for more understanding.
Franchising is better for starting your business from the ground. But if you are running a business already, franchising could be handing over the control to manage your ongoing operation to another company. You cannot follow your ideas of running your business which you were following till now.
When you look over the investment and cost, licensing wins because you do not require much investment compared to franchising; but you have to bear all the other costs by yourself. All the training costs, marketing costs, operational costs, and building setup or lease will pay out of your pocket. In franchising, these expenses are part of their fees.
Examples of licensing and franchising agreements:
Let us understand these two agreements with the help of examples for better clarification.
Example of Licencing agreement:
The best example of licensing agreements is Nestle and Starbucks. Almost everyone has heard these two names. In May 2018, Nestle (licencee) purchased the right to use, manufacture, and sell Starbucks products, including single-serve coffee, teas, and bagged beans, by entering into a licensing agreement with Starbucks (licensor). Nestle paid $7.15 billion to Starbucks as consideration or royalty fees.
Both the companies greatly benefited from the deal. Nestle got access to Starbucks products. It helps to build a strong brand image with the firm customer base. As the products have recognition and brand reputation in the market, it is easy to make a great sale. Starbucks cannot control the operations of Nestle but can set rules for product manufacturing, use, and selling.
On the other hand, Starbuck got access to commercialise its products through Nestle distributor chains.
Disney is another example of licensing. Disney characters like Mickey Mouse, mini mouse, and Disney princess are very familiar. Anyone can access the right to use, sell and manufacture companies’ products by entering into a contract in exchange for consideration.
Example of franchising agreement:
Everyone is aware of the names like Pizza hut, dominos, KFC, Burger king. These are the best examples of franchising agreements. These companies have their recognized brand and strong brand image in the market.
Why do these companies not contract licensing agreements?
They have a strong recognition for selling quality and unique pizzas from others. They have their recipes which makes them unique in the market. Using their brand logo or name to sell someone’s recipe can deteriorate their brand image. Their business reputations may come at stake.
Therefore they use franchising agreements and allow a company to use their business logo and brand model to expand their reach without compromising the brand image. They provide all the assistance and guidance to duplicate their product in exchange for royalty fees paid by the franchisee.
Franchisees also get access to the firm customer base of the recognized brand, which makes it easy to survive in the market.
Franchising is the best solution for those people looking for support to enter the market With ease. They can easily roll up by holding the shield of a recognized brand.
What works better:
Still, you feel confused about what works better for your business. Both of these agreements are better but deciding between these two is a daunting task. Franchise agreements are much broader; it requires a lot of investment and work. But the benefit is that it operates on a recognized brand name and makes it easy to survive in the market because of a strong customer base. You will also get support and assistance in organising and flourishing your business.
While licensing is best for those who want to expand their product line. You can operate your business on your terms. Although, a Licensor can set the rules regarding intellectual property but cannot interfere in the internal operations of your business.
Consider all the above things before arriving at any conclusion. Find the best fit that matches your business goals and needs.