By: SADMA Intern at Fastrack Legal Solutions
INTRODUCTION LICENSING AND FRANCHISING:-
Franchises typically work best for service-based businesses, while licenses are more
conducive to product-based businesses. Franchises and licenses are both business
agreements in which certain brand aspects are shared in exchange for a fee. However, a
franchising agreement pertains to a business’s entire brand and operations, while a licensing
agreement only applies to registered trademarks.
Franchises typically work best for service-
based businesses, while licenses are more conducive to product-based businesses. A licensee
has more control over how they run their business compared to a franchisee, whose business
will be dictated by the franchise owner (franchisor). However, a franchisee will also receive
significant guidance and training from the franchisor.
While franchising and licensing have some similarities, they are two very different
agreements that mean different things for both you and your brand. In this franchising vs.
licensing comparison, we’ll explain the differences between the two, as well as the pros and
cons of each. Also Read 3 Things about Dissolution of Partnership
WHAT IS LICENSING?
Licensing, on the other hand, is a limited, legal business relationship where a specific party
is granted rights to use certain registered trademarks of a brand. The business relationship is
between the licensor (the one who owns the trademarks) and the licensee (the one who is granted
rights to use them).
To use the registered trademarks of another brand, the licensee pays the licensor an agreed-
upon royalty fee.
DEFINITION:- Licensing is defined as a business arrangement, wherein a company
authorizes another company by issuing a license to temporarily access its intellectual
property rights, i.e.. manufacturing process, brand name, copyright, trademark, patent,
technology, trade secrets, etc. for adequate consideration and under specified conditions.
EXAMPLE:- Under the licensing system, Coca-Cola and Pepsi are globally produced and sold,
by local bottlers in different countries.
In finer terms, it is the simplest form of business alliance, wherein a company rents out its
product-based knowledge in exchange for entry to the market. Also Read What is The True Nature of Business Law?
WHAT IS FRANCHISING?
A franchise is a business agreement between a franchisor and a franchisee. The franchisor is
the owner of a business. The franchisor sells the rights to their brand — including products
and services, intellectual property, and more — to a franchisee, who will open up a separate
branch under that brand’s name, which is essentially a duplicate of the original business.
Franchises are regulated under the Federal Trade Commission’s franchise rule and must
comply with state laws.
As part of the franchise agreement, the franchisee will pay fees to the franchisor to open a
franchise, use their brand, and for advice and business support. The franchisor loans its
brand for a fee and provides training, as well as expertise, to the franchisee.
Franchising is a deeper, more complicated business relationship and agreement than
licensing.
A franchisor retains control over how its brand is used and how each franchise
under its name is operated. There is a lot of interdependence between the franchisee and
franchisor in a franchise relationship.
Example: One of the most famous examples of a franchise is McDonald’s. From a
a modest start, the McDonald’s franchise now has more than 36,000 restaurants around the
world.
Other famous franchise businesses include:
●Burger King
●Pizza hut
●Marriott International
●Dunkin’
●7-Eleven
●Subway
●Baskin-Robbins
●Taco-bell
●Ace hardware corporation
●The UPS store
Many chain restaurants and other well-known businesses operate as franchises. The key with
franchises is that no matter which one you visit, it will always look and feel the same, offer
the same products and services, and more.
DIFFERENCE BETWEEN LICENSING AND FRANCHISING:-
BASIS FOR LICENSING FRANCHISING
COMPARISON
- Meaning Licensing is an Franchising is an
Arrangement in arrangement in
In which a company which the franchisor
(licensor) sells the permits franchisee to
Right to use intellect- use business model
-ual property or produce or brand name for a
A company product to fee, to conduct busi-
The licensee, for royalty. -ness as an indepen-
-dent branch of the
Parent company.
2.Governed Contract law Franchising regulat
By -ions or company law
As the case may be.
3.Registration Not necessary Mandatory
4.Training Not provided Provided
And support
5. Process Involves one time Needs ongoing
Transfers of property assistance of
Or rights. Franchiser.
6.Fee Negotiable Standard
HOW FRANCHISING VS LICENSING DIFFER
If you’re looking into franchise vs. license agreements, it’s probably because you’re looking
into either building your business into a franchise business or loaning your brand to another
company for use. Knowing the differences between these two business agreements is key
before jumping into a legally binding agreement.
While some business owners may look at licensing as an easier alternative to franchising,
This would be misguided. These two types of agreements are legally very different and are
appropriate in different scenarios. Businesses that would make for good franchises would not
necessarily make for good licensing agreements and vice versa. Let’s take a closer look at
how licensing and franchising differ.
LIMITATIONS:- One of the major differences when it comes to franchising vs. licensing
is the limitation placed on licensing agreements. A license is much more limited than a
franchise.
A license agreement allows for the use of registered trademarks, nothing more. Franchise
agreements, on the other hand, allow for the use of trademarks, additional intellectual
property, products, services, operating manuals, and much more.
CONTROL:- Another difference between franchising vs. licensing is the amount of control
that can be exerted by the seller over the buyer.
In a franchise agreement, the franchisor can lay out specific guidelines for how the
franchisee markets the business, use brand trademarks, where the business is located and
how the business is operated. In other words, the franchisor can exert a significant amount of
control over the franchisee’s business and how it operates — because it is essentially an
extension of their own business.
In comparison, a licensor has very little control over the business of a licensee. The licensor
can make stipulations on how protected marks are used by the licensee, but they can’t control
any other aspects of the licensee’s business.
Types of business:-
Most often, businesses that grant or purchase licenses deal with products. Licenses are great
for adding a well-known brand or image to a product, such as clothing or another consumer
goods.
On the other hand, franchises are generally service-based businesses. Most businesses that
form a franchise operation are chain restaurants, hotels, cleaning services, auto repair
shops, software repair companies, etc.
CONCLUSION:- To end up this discussion, there is one more point to uphold, i.e.. in general
franchising is comparatively more stringent than licensing because usually, franchisers set strict
rules, regarding the operations of the business by the franchisee.
