What Is the Difference Between a Licence and Franchise Agreement?

4 min read

If you’re thinking about growing or expanding your own business, you might have already considered the option of using an established brand to give yourself a better starting point.

Licensing and franchising are two business models that are available to you, and both of them can get you a significant return on investment and help you grow your business much easier.

Still, there are some important differences between a licence and a franchise agreement you should be aware of before opting for either of them.

A Licence Agreement

A licence agreement is a formal agreement in which the owner of the intellectual property sells the right to use that property to other businesses, and gets royalties in return. The licensee has the right to use the brand, logo, trademark and the know-how of the licensor, in terms defined by the agreement.

Most often, this type of agreement is preferred by businesses that are already established and that look for ways to expand their offer. 

There are a couple of things that you should know when entering such an agreement as a licensee:

  • You will determine your own marketing strategy and pay for it.
  • You will be free to develop and run your own business system.
  • You don’t need to comply to any performance criteria of the licensor.
  • You’ll need to pay fees.
  • You can use trademarks and other intellectual property of the licensor.

To understand the functioning of licensing better, think of a fitness program, for example. 

Someone established a great fitness practice that has been recognized by the fitness crowd. You want to add that specific program to your gym to attract more clients, so you’ll pay for the licence, and then pay royalties to keep the practice going. The creator of the program is not interested in how and where you perform those classes, although they might give you some broad guidelines.

Similarly, if you’re in the manufacturing industry, you can decide to buy a licence and start manufacturing certain products, such as smoke and fire ductwork, that already have their place on the market. 

That’s why it’s a good idea to become a ThorDuct licensed manufacturer and expand your offer with a complete tested and certified ductwork package. 

In both cases, you will be free to grow and expand your business the way you find appropriate, while still getting a needed market push.

A Franchise Agreement

A franchise agreement is a type of contract where the original company (the franchisor) will permit a local company (the franchisee) to use their business model and brand, for a certain fee. 

This type of agreement gives the franchisor more control over the franchisee than licensing. A franchisee gets support and training from a franchisor to run the operations according to a well-established and successful business model. There are also a lot of very specific directions on how the branch must operate the business.

Some basic things you need to know before getting into a franchise agreement are:

  • There is a common marketing plan for all franchisees that you need to adhere to.
  • You will have to adopt the exact business methods and systems of the franchisor, from the uniforms to the location you will be working at.
  • You will have to meet certain criteria of the franchisor, such as minimum performance.
  • You will need to pay certain fees and possibly give payments to a marketing fund.
  • You will use the intellectual property of the franchisor, including the latest developments and innovations.

To understand franchising better, you can picture any international fast-food chain out there, including McDonald’s, KFC, Dunkin Donuts or Pizza Hut.

Every restaurant looks and feels the same – you have the same offer, the same uniforms, and the same phrases used when interacting with customers. There are very strict guidelines for each part of the process, guaranteeing quality standards, high customer satisfaction, and business success.

How Do I Choose the One That Is Right For Me?

Your choice between these two models will pretty much depend on how much you are able to invest, but also on how keen you are on keeping control over the way you run your business. There are those who highly value the safety that results from all the support they get from the franchisor, as well as from the fact that when opening a franchise they get a ready-made customer base.

On the other side, if you’re among business owners who don’t really like the idea of such a low level of control over their business, or if you already have established business practices that bring profits, you may find that purchasing a licence for one more product line is just what you need to make your business flourish.

Consider all your options wisely and weigh all the pros and cons of both these approaches in order to make the right decision.