Licensing and franchising are effective ways to take your business to the next level.
Businesses in the UK that are thinking about whether to franchise their business have the option to use a simpler, cheaper approach to achieve the same ends, namely licensing.
What are the considerations when choosing between the two options?
Both options involve finding people with the right skills to be trainable to operate a business using your successful format. They’ll invest to buy the rights to use your brand name and methodology and their chances of success in business will be improved through having access to a tried and tested system that has been proven to work. That’s the essence of the arrangement.
Once you select someone to become your franchisee, you will need to train the new recruit in the way you operate your business. They will get access to your proven systems and processes.
Almost any type of business can be franchised.
A franchise leaves you in control of the brand and training, and you’re then giving permission to the franchisee to use your brand and other intellectual property (which includes your know-how) to operate your successful business model.
The franchisee will put up the initial capital for the business, paying you a licence fee. They agree to strictly comply with your established ways of running the business as stipulated in your operations manuals.
The franchisee will be promoting your brand and will expect to have a successful business simply because they will be following a successful proven path. You are expected to provide support to your franchisees in the form of marketing, access to trusted suppliers, systems, and other resources and skills.
Training becomes a core part of your business activity once you take on franchisees.
Permission to use your intellectual property (IP) lies at the heart of a franchise contract.
A franchise agreement will generally give you a lot of control in how the business is run. The franchisee must follow the format extremely closely and not deviate from your established processes and systems. For example, if a customer visits a branch of McDonald’s they must find the familiar products, look and feel and service that they are used to experiencing. There must be no differences that are likely to jar or lead to disappointment.
It’s generally accepted that the slightest difference in the business format could damage the franchisor’s brand, not just that particular outlet. That’s why the franchise agreement will have strict quality control provisions in it, and strong sanctions against a franchisee who attempts to break out and introduce their own ideas.
A franchise includes licensing in that “licensing” is a term that simply means the granting of permission to a third party to use the owner’s know-how and other confidential information, trademarks, logos and designs, and copyright materials. For some businesses, there may be patents involved too.
The essence of licensing is also the granting of permissions by the owner to a third party to use some or all its Intellectual Property.
One of the main differences between franchising and a straight licensing arrangement is in the formalities involved to set up a franchise, and the degree of control you retain as franchisor.
If you want to give another business, (perhaps one that’s operating in other parts of the country), permission to use your business format, and don’t want to go through the formality of franchising, then you can create a licensing arrangement based loosely around franchising.
The licensing agreement might impose many of the same controls as a typical franchising deal would include, but without going through the regulations imposed around franchising.
It’s important to make sure the laws of the country in which you’re making your arrangements do not impose fines for effectively running a franchise under a different name. Certainly, in the USA there are hefty fines if you attempt to pass off what is essentially franchising as licensing.
As in all areas of legal life, it’s not what you call something that matters, but what it amounts to in substance.
Some businesses prefer to use licensing rather than franchising. For example, once you receive more enquiries than you can handle, you may decide to use licencing to give other individuals or businesses the right to deliver your solution using your brand. For example, they might continue using their existing business name, and simply offer your product under your brand name as one of their offerings to their clients. They would be trained in your methodology to deliver the product or service to customers in their part of the country.
Brand licensing is how licensing started. I covered this more in Licensing And Franchising, What is The Difference And Does It Matter?
If you have built up a brand name and want to licence third parties to use the name or to deliver a related product using your brand in their own business, then licensing might be a good option.
Any “licensing” deal that is so close to franchising that it blurs the boundary between the two is in truth franchising under another name.
If there are no problems in doing so in your country, then you might want to work towards franchising by using a “licensing” arrangement first. This might be a way to try out the model with a few trusted sources so that rather than diving straight into franchising, with all the due diligence and formalities it entails, you test it out as part of your business model.
The important thing is to use a good agreement that protects your IP. Your brand, patents, know-how, trademarks, etc. These are precious assets, which should not be shared casually. The terms on which you grant licences or franchises need to be carefully considered, and we at Azrights are well placed to support you.