People often wonder what the difference between these two terms is, and why it matters, so in my blog Licensing and Franchising – What is The Difference, and Does it Matter? I have explained the distinction between the two. In particular I outlined how you would be exposing your business to hefty fines in some jurisdictions, such as in the USA, if you tried to license your business format instead of franchising
Franchising is the only option if you’re looking to scale a business in the way successful franchise operations like McDonald’s, Burger King, and KFC have done. Here is a list of the top 100 global franchises
While many franchises involve the hospitality industry, there are also many examples in that list of business formats in other industries such as Kumon Maths, or Cleaning, or Business consulting which would not involve the need for a franchisee to invest in premises.
If you’re considering franchising your successful format and the franchisee would not need to secure premises to opt for your franchise, you have the option to use licensing of you intellectual property (IP) instead of franchising as a first step, and possibly as an alternative to franchising, if you’re based in jurisdictions like the UK which do not impose fines for using the licence format instead of a franchise.
One benefit of this is that there are fewer formalities involved in setting up a licence.
The essence of licensing is the granting of permissions by the owner (licensor) to a third party (the licensee) to use IP.
You can identify your own business arrangements basing them around franchising. Or you could even impose the same controls as a typical franchising deal but do it without the huge costs involved in setting up a franchise operation. Test the waters with some licensees you know and trust, and see what works and what doesn’t before you go to the expense of committing to a franchise.
Coaching businesses are an example of a business that might scale by using licensing. For example, an organisation becomes known and successful for coaching a particular group of people. The owner of the business has more coaching enquiries than they can deal with, so they licence other individuals to coach customers using their methodology and processes.
The reason I am keen on promoting licensing as a first step is that you would be improving your business by taking the steps that licensing involves. These include putting your IP in order, securing your rights properly rather than relying on DIY trade mark registrations, for example. You would transfer your IP to holding company which is well worth doing anyway in order to protect your IP if the trading company becomes involved in a dispute. You would also need to get the right systems in place in your business, such as a suitable CRM, and make sure all your processes are spelt out so that others can operate the various tasks involved in running aspects of the business. Doing this makes sense for any business, not just one that is planning to license or franchise it’s operations.
Once you’ve prepared your business for licensing, and tested the waters with a few licensees, you would be ready for franchising. However, it would cost a fraction of the usual hefty costs involved to set up a franchise, meaning you could probably avoid the need to get a substantial loan to set up your franchise.
There is every benefit in using licensing of your business format before going down the franchising route.
Any “licensing” deal that is so close to franchising that it blurs the boundary between the two is in truth franchising given another name. Do make sure the country in which you are making the arrangements doesn’t regulate franchising though, as it could cause you problems.
In my view “licensing” is a good way to try out the model with a few trusted licensees rather than diving straight into franchising, with all the due diligence and formalities that it entails. You could start by finding a few licensees who are willing to license some or all of your business model.
The important point to note is that licensing your brand, know-how, trademarks etc involves your most precious assets. The terms on which you grant licences to third parties need to be carefully considered.
Do contact us to find out how we can help you to license your business format.