Licensing Vs. Franchising

The difference between licensing and franchising is that licensing is a legal relationship that is limited in scope and relates only to the use of a trademark or technology, whereas franchising involves a relationship that goes beyond the grant of a license and includes a relationship of control where the underlying business is required to operate in accordance with designated systems and procedures.

When comparing franchising vs licensing, many times, the question arises as to whether or not licensing is an alternative to franchising? The answer to that question is that, no, licensing is not an alternative to franchising. The reason is that the franchise laws broadly define a franchise as a relationship that involves (a) the license of a trademark, (b) a degree of control over business operations (i.e., such as standards and specifications), and (c) the payment of an upfront fee. So, if your goal is the unit expansion of your business, i.e. involving a relationship where you will have some control and say over what your franchisee / licensee partners offer and sell, then the relationship is most likely a franchise. 

What is a License?

A license is a legal relationship where one party, called the “Licensor”,  grants to the other party, called the “Licensee”, the right to use or benefit from a trademark, technology, or other legal rights. Examples of licenses, include:

(a) A license where one company, as licensor, allows another company, as licensee, the limited right to use a trademark for a limited purpose. Example: An example would include Walt Disney granting McDonalds a license for McDonalds to co-brand its McDonalds Happy Meals with a Disney trademarked character;

(b) A license where a technology company, as licensor,  grants a license to an individual or company, as licensee, to use a particular technology. Example: An example would include Microsoft granting a license to individual users allowing them to use the Windows operating system;

(c) A license where a drug company that owns the patent to a certain drug, as licensor, grants a license to another drug company, as licensee, allowing them to manufacture and sell a drug that utilizes the patented formula.

In all of these examples, the license is granting a limited right related to a particular asset – whether a trademark, technology, or formula. The agreement that creates the relationship between the licensee and licensor is called a “license agreement” and while the license agreement will restrict what the licensee can and cannot do with the licensed asset, the license agreement does not allow the licensor to exert control over the overall operations of the licensee’s business. Using the McDonalds / Disney example, although Disney will have say and control over how McDonalds uses Disney’s trademarks on McDonalds Happy Meals, Disney does not have control over McDonald’s overall business operations.  

What is a Franchise?

A franchise is a legal relationship where one party, called the “Franchisor”,  grants to the other party, called the “Franchisee”, the right to develop, establish, and duplicate the operations of the franchisor’s business. There are many examples of franchise relationships throughout the United States economy and include restaurants like McDonalds, retailers like GNC, and businesses in a wide variety of industries that even include health care like American Family Care.

Under the franchise laws, a franchise relationship is created when the following three elements exist:

(a) Trademark License – The license of a trademark, i.e., you grant your franchise the license and right to use your business name or trademark to duplicate your business and establish a new location or service territory;

(b) Degree of Control – You require your licensee to enter into an agreement that gives you, as franchisor, a degree of control over the operations of your franchisee, i.e., you restrict what they can and cannot sell from their business; and 

(c) Payment of an Initial Fee – You receive an upfront payment or fee, i.e., at the time of granting your license or entering into an agreement, you are paid a fee, i.e. you receive an upfront fee, whether or not you call it a franchise fee, a license fee, an inventory fee, or whatever else you may call it. 

If these three factors are present – License + Control + Fee – then chances are (99.99%) that your legal relationship – no matter what you call it – is a franchise and requires that you comply with the franchise laws. Under the franchise laws before you offer or sell a franchise or accept any funds, you must first issue an FDD, properly disclose it, and, register and file with the franchise registration states.

Summary

A license is a limited legal relationship. A franchise is a more extensive legal relationship that includes a license. If your goal is to expand and grow your brand through additional outlets or service areas, then franchising is the correct legal model and licensing is not an alternative. To learn more about licensing vs. franchising get the guide. To learn more about converting your license system to a franchise, click here. To learn more about franchising your business, click here.