Licensing Vs Franchising

Businesses that have a strong IP get into business arrangements with other people.

Mainly the reason is to utilize and monetize their existing trademarks or propreitory technology.

Two types of arrangements come into play here:

a) Licensing

b) Franchising

Founders have a habit of mixing these two terms, and that's where problems arise.

Parties try to enter into a licensing arrangement.

But instead, they end up with an arrangement that looks like a franchising deal.

That's why it's important to understand the differences between the two:

(1) Levels of Control

Licensing arrangements are more limited in the sense that you are only lending your IP or Tech to someone.

They use it, but you never tell them how to operate their business using it.

Franchising, on the other hand, is like having a say in the whole operation.

You are not just sharing your brand.

You're influencing how the business operates overall.

(2) The End Goal

The primary goal behind licensing is to monetize trademarks or a brand by licensing it to third parties.

For example:

Michael Jordan licensed his name, image, and personal brand to Nike for the Air Jordan Series.

Franchising is like a joint venture and an extension of an already existing brand or business that wants to expand.

A famous example is McDonald's restaurants - every restaurant operates under uniform systems and standards.

(3) Legal Regulations

Entering into a licensing arrangement is easy.

You can enter into an agreement and it’s done.

With Franchising, there are a few more steps.

There are specific regulations and laws for franchises.

And ignoring them could get you into trouble.

(4) IMPORTANT - Always Limit Degree of Control

Now here's where the issue arises.

Business owners who want to allow third-party use of their IP seek to control too much business of such a third party.

And this turns the license into a franchise.

Some degree of quality uniformity control to avoid damage or loss of IP is fine.

But too much control, beyond the ambit of licensing, can turn it into a franchising arrangement instead.

And then, in turn, make the franchise regulations apply to you.

Some parties may even try to evade such regulations by labeling their franchise as a licensing system.

And this carries a serious risk of future legal costs.

That's it!

What you label the agreement as is as important as how you treat the whole transaction.

Written words + action should go side by side.

So remember this next time when you are signing a Licensing or Franchising agreement.

P.S. Have you ever signed a Licensing or Franchising deal?

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