Updated November 10, 2023

Difference Between Franchising vs Licensing

Licensing – This is a model in which the Licensee (local business) will attain the intellectual property (Trademarks, Patents, Copyrights, etc.) of the Licensor (Established Entity) for an agreed royalty. Upon which the Licensee would contribute appropriate capital investments to set the business running in his localized location. Example – Ranbaxy Laboratories. The Franchisor, the original organization, grants the Franchisee, a local person, the right to use their business model and processor brand name and operate as an independent branch for an agreed fee. This is how franchising, a specific business model, is defined. Examples are McDonald’s, Burger King, etc.

Let us study much more about Franchising vs Licensing in detail:

A Business Model is an organizational rationale, strategy, and operational technique that a particular Business entity would use to generate revenues and margin for its sustained growth. There are many business models available on a domestic and international scale. Out of these, the most common is Franchising vs Licensing. These trading models, franchises, and joint ventures focus on utilizing the local entrepreneurial talents of an established parent organization. Both models have a mutual business understanding between the parent organization and the local entity. This understanding would be codified in a legally enforceable agreement, where the parent entity would specify the agreed norms and conditions, royalty fees, and maintenance of accounts in clear terms with the franchise licensee. This arrangement could be in both Domestic and International dimensions.

Head To Head Comparison Between Franchising vs Licensing (Infographics)

Below is the top 5 difference between Franchising vs Licensing

Key Differences Between Franchising vs Licensing

Both Franchising vs Licensing are popular choices in the market; let us discuss some of the major differences between Franchising vs Licensing:

Fundamental Concept – The main concept in Licensing is the ability to sell the Intellectual Property or technological know-how to any Licensee company by the Licensor Company for an agreed royalty (on sale). In Franchising, the Franchisor will, in effect, launch an independent branch with one specific Franchisee (local company) in a location for a specific fee.

Control by the Parent – Licensing agreements would include acquiring intellectual rights and privileges but not subject to the managerial directions from the Licensor to a Licensee. When the managerial directions, supervision, norms, and regulations from the Parent are binding on the host, it is called Franchising.

Services and Training – A licensor normally does not give services and training to the Licensee post the commencement of the agreement. At the same time, a Franchisor is bound to provide services and Training to the franchisee as per the agreed understanding.

Compensation – In licenses, the Parent and the Local company will have to be registered, and there will be a series of negotiations on the license fees by the parties concerned. While in Franchising, although the registration is not mandatory, the fee structure is pretty much standard, and there is little room for negotiations.

Applicability – The franchisee applies to those local organizations that do not have the sophisticated technical and operational infrastructure to manage the business. Here, the parent company (Franchisor) will give the appropriate guidance and territorial monopoly. Whereas in Licensing, the Licensee (Local Company) needs to have sophisticated technical and operational facilities because the Licensor can sell his IP to any number of people, and you should have the individual capacity to compete with them all.

Developmental Costs – In licensing, the Licensor will incur a particular development cost (R&D expense) to attain the intellectual property recouped through Royalty fees from fellow Licensees. While in Franchisee, the Franchisor will charge a specific fee to encash its Goodwill / Brand Name to generate business in the local area in return for a standard Franchisee Fee from the Franchisee.

Franchising vs Licensing Comparison Table

Below is the topmost comparison between Franchising vs Licensing

Basis of comparison	Licensing	Franchising
Concept	It is a legal arrangement in which an organization (Licensor) will sell the intellectual property rights to the local company (Licensee) for royalty.	It is a Legal system where the Franchisor (Original Company) will permit the Franchisee (Local Company) to use its business model and brand for a specific fee, like an independent branch.
Compliance Aspect	Licensing is governed by the respective Contract acts at a national and international level via the Paris Convention, i.e., TRIPS (Trade-Related Intellectual Property Rights).	They are protected by the respective Franchise laws of their territory. Currently, an international law specific to Franchising has not been made.
Sphere of Control	The Licensor may have some control over the intellectual property given to the Licensee but have no control over the particulars of his business operations.	The Franchisor can exert considerable control over the Franchisee business and operational models by establishing norms, inspections, and maintenance of accounts.
Nature	Licensing involves a one-time transfer of specific intellectual property from the Licensor to the Licensee without providing training and support.	On the other hand, Franchising involves ongoing assistance from the Franchisor to the Franchisee, including training and support.
Territorial Monopoly	The Licensor can sell his Intellectual Property to multiple Licensees in the same economic territory. Hence, there is no implicit monopoly in licensing.	A franchisor can only appoint one specific Franchisee as its independent branch in a specific economic territory. Hence, monopoly rights are allotted.

Conclusion

In this article comparing Franchising vs. Licensing, we have seen that large parent companies often consider both models cost-effective and feasible ways to enter a specific economic region. Even in both cases, the parent company would not suffer the losses (as the Licensee gets Royalty and the franchisee – Franchise Fee, generally with no cost obligations to the local entity). It could, therefore, hedge out from the business risks involved.

As in both of the above models, since a local company carries out the business, there would be a higher probability for the parent company to gain in the long run because the Local company would have better market knowledge in the specific area and would have the appropriate contacts to materialize deals. Usually, in some nations, when the Governments feel that a Foreign company is earning exorbitantly, there would be a possible regulatory restriction or even a takeover. However, having a localized Licensing or a Franchisee agreement in the said nation would insulate the parent company from facing any possible regulatory or legal risks in the event of regulatory action.

But having discussed the above, the Franchising or Licensing models are not without their cons. There are numerous cases in which a Franchising or Licensing would be starting an identical product or business that could become a tough competitor to the very Licensor or Franchisor itself. The local Franchisee or Licensee who attains the trade secrets or other confidential information from the Franchisor or Licensor could even pass on the same to the Competitor of the Parent company (i.e. Licensor, Franchisor), which will harm its business Globally. Moreover, some past experiences have also seen occasional conflicts with the Licensor by the Licensee on the payment of Royalty, conflicts in the areas of maintenance of accounts, and non-adherence to norms between the Franchisor and Franchisee.

In summary, franchising and licensing can be excellent methods for expanding one’s business. However, it is crucial to carefully analyze the feasibility factors of each option over the long term before deciding which one to pursue.