When starting a business, one of the first decisions you must make is whether to license your business concept from an existing company or become a franchisee. Both options have pros and cons, and it is important to understand the differences before deciding. Our New York business transaction team discusses the key differences between licenses and franchises and helps you decide which option is best for you.
Franchise Vs. License
Both franchises and licenses are business agreements in which certain aspects of a brand are shared in exchange for a fee. A franchise agreement pertains to a business's brand and operations, while a licensing agreement only pertains to a registered trademark. Franchises work best for service-based businesses, while licenses are better for product-based businesses. Licensees have more control over their business than franchisees, whose business is governed by the franchise owner (franchisor).
Franchisees, however, will also receive training and guidance from their franchisors.
Even though franchising and licensing are very similar, they are two very different kinds of agreements. Let's explore the main differences between the two below.
Business model
Franchises are only for providing services. Licensing is for both services and products. For example, It is possible to franchise a restaurant or salon, but not the products they use to provide their services.
Control & influence
Second, there is the issue of how much control the two parties have. In franchising, the franchisor significantly influences how the franchisee runs the business. Franchisees control crucial decisions such as marketing strategies and service quality. There is little wiggle room for franchisors. With licensing, however, the licensee is free to decide what to do with their products or services without needing approval from the licensor.
Support
Another difference is how the process is handled. In franchising, the franchisor (the seller) assists the franchisee in setting up the necessary systems. Typically, licensing agreements do not include such technical support.
Ownership
The fourth difference is with the ownership. In a franchise partnership, the business belongs to the franchisee. The franchisee runs the business for the franchisor, but at a fee. In a licensing partnership, the licensee only pays the licensor for a specific product, for which the licensor may have taken out patent rights. However, the rest of the business, which doesn't need the products of the licensor, may continue running independently.
Regulations
Finally, the regulations for franchising tend to be stricter. Franchising regulations are governed by company law. This differs from licensing regulations, which are governed by contract law.
M. Ross & Associates, LLC Is Here to Help
Now you should better understand the critical differences between franchising and licensing. If you are unsure which option is best for your business, M. Ross & Associates, LLC can help. We are experienced in assisting businesses with transactions and can provide guidance on what is best for your company. Contact us today to learn more!
Contact M. Ross & Associates, LLC at (201) 897-4942 for dependable advice and comprehensive client services for your business transaction needs!