Difference Between Franchising and Licensing

Franchising vs Licensing

It is really a great feeling to be changing over from an employee to an owner. But if you are starting a small business that is dependent upon selling products of a big company, there are two ways you can do it. Either you get a license to sell the products or services, or you become a franchise of the company. It is really very confusing as the two terms are almost same and you never gave it a thought but now you have to decide between the two. Franchising and licensing are two concepts of doing business with big companies that evolved during the eighties and have become very popular and almost a norm these days.

Franchising

Franchising is perhaps the most popular model of doing business with large companies these days. Who hasn’t heard or visited McDonalds or KFC to have a wonderful meal? But the outlet you went in is not managed by the company itself and is in fact looked after by a franchisee that is carrying out business by getting the authority to use the logo and the company name in lieu for shared profits with the company. In franchising, the very fact that the company name and logo is utilized by the franchisee reflects upon the level of relationship between the company and the franchisee. The company places its faith in the person and he has to maintain the quality and standards of the product. He gets the benefit of the advertisements done by the company. He gets readymade customers because of the goodwill of the company and an already developed market.

Licensing

Licensing is another popular model of business. Here the relationship between the company and the person are not as tightly knit as they are in franchising. The business owner, in most cases is not allowed to use the logo or the trademark of the company. In many instances, licensee has to work hard to establish his own identity in the market. In licensing, the company does not grant exclusive territorial rights to the licensee and retains the right to grant more licenses in the same geographical area to other persons as well. This becomes a headache for a person as he faces stiff competition from others who are selling the same product. Licensing is beneficial in monetary terms as there are better margins for the licensee. There is not much of a relationship and the licensee just purchases the products and sells them on his own.

Difference between Franchising and Licensing

Large companies have both the models to offer to a person who wishes to be liked with them. As a business owner, one has to choose from the two models as to how he wishes to go ahead. If he feels that he can work hard and sell the products of the company in the face of competition from others, he can choose to become a licensee which offers better profit margins for him. But if he is comfortable with the advertising of the company and wishes to have a readymade market, then franchising is a better option for him, though with reduced margins.

In franchising, there is a lot of support from the company to the franchisee in terms of advertisement and training whereas there is no such support in the case of licensing

In franchising, you have to pay royalty to the company every time you make a profit while in licensing, you keep the profits for yourself.

In franchising, the company cannot make another franchisee without prior approval from the franchisee but in licensing the company is free to sell its products through any number of licensees in the same geographical area.