If you own a small business, it’s likely that you understand the frustrations with helping it grow.
Bigger businesses are able to come up with additional resources to match their bigger budgets effortlessly, leaving the smaller guys in the dust in terms of market share.
In response, many small business owners choose to work out franchising or licensing agreements with other businesses, in order to grow without committing additional resources. But, which one is better and what exactly is the difference between franchising and licensing? In this post, we’re going to walk you through exactly that — read on to learn the difference between the two and how to determine which one is right for you.
Franchising — An Explanation
Before we help you determine which option is best for your business, let’s go over the differences between franchising and licensing.
Franchising involves opening an independent location of an existing brand. Usually, franchises stem from already-existing businesses with successful business models that are looking to expand without having to run a new location themselves.
For example, if another person wants to open a store without starting a new business from scratch, you could allow them to open a branch of your store. You would reserve the rights to control decor, layout, and employee training, all while allowing yourself distance from the day-to-day operations. In essence, it’s a way to expand your customer base without committing your whole budget to a new store.
Without going into the nitty-gritty details of franchising law, franchises are governed by securities law, meaning that a business belonging to a franchisee is a financial asset of your brand. In establishing a franchise agreement with a small business owner or an aspiring franchisee, the franchise retains most of the control. In essence, franchising your business mean you are giving others the permission to make money off of your business concept while expanding your brand. Though other people are making money off of your initial business idea, you make money from the brand. And undoubtedly, the more franchise locations you have, the more money you will make.
Licensing — What You Need to Know
The fundamental difference between franchising and licensing is that in licensing, the small business owner doesn’t relinquish as much control over their business as with franchising. In licensing, another individual is buying the rights to use aspects of another company’s branding, products, and trademarks in exchange for a percentage of the proceeds to be paid back to the licenser in the form of royalties.
Sound confusing? Let’s break it down. Let’s say your store has a particular product line or brand that’s earning more revenue than others. Rather than open a new location to focus on that product or brand specifically, you could sign a licensing agreement that allows another business to sell your goods or use your branding in exchange for royalties.
For example: If you own a boutique in which you successfully sell your independent clothing line, you can license some of your designs to more established retailers.
Governed by a contract rather than securities law, a license agreement is advantageous for the already relatively successful small business owner, whose brands and intellectual property are seen as attractive by other stores and small businesses.
The Distinction in Terms of Business Models
Now that we’ve gone over the general differences between franchising and licensing, let’s take a look at the distinction regarding business models because this is where the majority of the differences come into play. Many of these differences can have big implications for the small business owner looking to expand.
The key distinction between franchising and licensing your small business’ brand is that when franchising you retain most of the control of the franchise and reserve the right to impose your business model to ensure its success. This includes aspects such as programs to train employees to remain consistent nationwide.
A perfect example of this is the sandwich franchise Subway. Have you ever noticed how there aren’t any major differences between locations across the country? This is because the Subway corporation exercises complete control over the decor, equipment, and protocol of each franchise. This way, your customers — regardless of the state they are in — know that they will receive the same standard of service and product across locations.
In contrast, licensing offers you no control over the way your products are marketed. Once you sign over the rights to your products and intellectual property to another company, they can advertise using your brand however they like.
Another aspect to take into consideration is territory rights. When you franchise your business, you define the boundaries of the territories to prevent competition from another franchise or even the existing franchise company. However, your brand can be licensed to any store or business, anywhere, meaning that if you have established brand recognition, your franchisees won’t be restricted by territory and you can focus on opening additional stores wherever you see a need.
For example, Cheryl’s Cookies was started in Central Ohio as a made-from-scratch bakery business in the 1980s. It was a small, brick-and-mortar business until it began to gain major popularity within the community. Interested in growing the brand even further, the proprietors of the store began to open new locations while licensing their brand to other stores. This way they could ride the success of their products in other stores without having to relinquish any control over their brand.
So, Which One is More Useful For Your Small Business?
It depends on your business model. If you don’t have the resources or the capital to open new stores yourself, you can franchise your business to other business owners. Whenever possible, follow the Subway model and make sure your store has a simple design and is easy to open. This will attract the highest number of franchisees. This is also an excellent option for small business owners willing to relinquish some control over their brand in the name of expansion.
On the flip side, if you have a strong and recognizable brand, consider licensing your products or your brands to other stores. This is a way to diversify your markets without opening any additional brick-and-mortar stores until you have the resources.
Now that you understand the difference between franchising and licensing it’s time to decide where your priorities fall for your business. Starting and running a small business can be challenging, so it’s important to determine what is best for you and your business. What is most important to you as a small business owner? How important is complete control over your brand? These are a just a few questions you need to ask yourself before jumping into either franchising or licensing.