Franchising and Licensing: Explanation, Difference

Priyanshi Shah November 2, 2020January 16, 2023 0 Comments

Franchising:

Franchising is a business model whereby a brand the franchisor would expand its footprint of a proven concept to a network of franchisees. It’s important that the business model product and systems are scalable and teachable to new franchisees. If it’s a successful brand; chances are that it has been franchised like fast foods, restaurants, fuel stations, supermarkets, beauty salons, service centers the list goes on and the franchising market keeps growing year on year which is great news for franchisers, franchisees and potential franchisees.

In 2018 more than 5000 new stores open and there is now higher ownership by franchisees. More stores mean creating more jobs across the country, more women joining the market, and better access to your favorite brands. For brands, franchising means getting to the people where they are capturing new markets in a competitive environment with less risk for franchisees. It means not having to start a business alone. An established brand has a loyal following that offers consistency and quality along with access to preferred suppliers which lower costs and increases spending power. Franchisees get startup assistance training and rights to trade under a brand name.

Success is not just about a brand; you need a banking partner who understands the ins and outs of franchising. A partner who focuses on optimizing your business and maximizing its effectiveness.

For e.g. McDonalds, for instance, operates fast-food restaurants across the world through its franchising system.

Advantages:

Cost reduction: Inventory and supplies will cost less than running an independent company.
Profits: The profitability for a small business to succeed is high as they have the backup and support.
Staff training: The franchisor provides the training to the staff so that they can serve properly to the consumers.
Star power: Many well-known franchises have national brand-name recognition.

Disadvantages:

Right and the only way of getting things done: The freedom of the franchisee is limited. The franchisee tries to exert exaggerated levels of control.
Continuing cost implication: Apart from the fee and royalties paid, the franchise should continuously share the revenue with the franchisor. In addition to this, the franchisor charges for services like advertising and training.
Risk of franchisor getting bought: The franchisee suffers problems, losses, and difficulties when the franchisor fails or if the franchisor is bought up by another business.

Licensing:

Licensing is the process of leasing a legally protected entity such as a character, a name, logo, or design. Brand owners can lease their rights to their intellectual property allowing them to tap into new markets faster. Retailers and manufacturers can increase sales by expanding their product offerings through brands. Simply put licensing offers brands, manufacturers, and retailers additional revenue streams through the sale of consumer goods without major risk or investment. The best part is consumers benefit when brands partner with manufacturers and retailers create valued products and services.

For e.g. In May 2018, Nestle and Starbucks entered into a coffee licensing deal. Nestle agreed to sell Starbucks products while Starbucks will receive royalties from packaged coffee sold by nestle

How Does Licensing Work:

Brand owners develop intellectual properties that earn trust and loyalty from consumers. They can lease their IP (intellectual property) to expand into additional product categories which may increase sale, open new market territories, and help them to protect their intellectual property. When a brand owner leases their rights to their intellectual property they’re known as the licensed source. Licensed source earns royalties on products sold to retailers that are branded using their intellectual properties.

What is Product Licensing:

You’re basically renting or licensing your product idea to a company that’s already in business. They’re currently selling their own products online and in stores and they’re going to bring your product to market and in exchange, they’re going to pay you a royalty on each and every they sell. So, they’re doing all the heavy lifting while you supply them with a great idea. The traditional way to bring a product to market is to start a company that means you must write a business plan, raise capital, do the marketing, manufacturing, advertisement fulfillment.

Benefits of Licensing a Product:

1. Protection: When you license your product to a big company that already has self-space, they can bring it to market very quickly and because of their size and distribution. It’s the best way to protect your idea from copycats.

2. No risk: There are simple tools to test the market without spending large amounts of capital. For Filing expensive patents or even building expensive prototypes you do not need to quit your day job.

3. Increase Your Success Rate: As with any business there is always a risk but with the licensing business model, you’re putting the vast majority of that risk off onto your licensee and you can work on and test a lot of ideas and you’ll always have the financial bandwidth to move on to your next idea.

Also Read: Share Certificate and Share Warrant: Explanation