Franchising and licensing. Differences and similarities
FRANCHISING AND LICENSING. DIFFERENCES AND SIMILARITIES
By Marcel Portmann, Global Operations & Strategy, Portmann Consulting Group
The question is often asked on what is the best way to expand a product or service, with franchising and licensing coming up as valid alternatives. There are key differences among them, which include terms of duration, initial investment and ongoing payments.
It is important to note that franchising is a form of licensing, specifically the licensing of the intellectual property of a brand, which, when applied as part of a full format franchise program, adds to the brand licensing rights additional elements such as initial training and ongoing support, as well as a defined look and feel for the business, whether it is a service or a retail concept.
To become part of a full format franchised business, the potential partner does not need – in most cases - previous experience in the business being considered, as the Franchisor – owner of the brand and system - will train its franchisees – partners - in all aspects of the business as part of the initial training and provide ongoing support as the business evolves.
Licensing, on the other hand, in most cases, requires actual experience and existing involvement in the business of choice. In this regards licensing combines the rights to manufacture with the responsibilities of distribution, requiring its partners to have the production and/or sales channels to award the rights.
When we look at duration and payments, full format franchising agreements are longer than traditional licensing, as they have a higher initial capital expenditure because of initial fees to cover training, territory and potential market. An Area development franchise for example will include the requirement to open several outlets in a defined territory, in a set period - 10 years or more - known as the development schedule. In what is known as Master Franchising, the initial fee may be calculated considering the revenue generated with sub-franchise fees and sub-franchise royalty payment sharing.
Royalty payments in a full franchise program are a percentage of the sales of the business in a given period, sometimes with minimums. A licensed agreement likely will not have an initial payment, agreed duration of 2 to 4 years average and a percentage of the sales generated Marcel Portmann
with minimum payment amount by the license holder. Territory wise, the license agreement combines more channels for the licensee to generate sales and achieve the minimum agreed.
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