Franchising Vs. Licensing: What’s Right For You?
Many people don’t know that there is a difference between a licensee program and a franchise program. And the programs within each of these can be very different depending on the company.
Some of the most common differences include:
- Franchises are governed by securities laws and require a Franchise Disclosure Document (FDD). Licensee programs are governed by contract law and aren’t required to provide information on all deals ever made.
- Franchises sell territorial rights to individuals to either open locations under that brand or to sell to franchisees under that brand (generally referred to as Area Managers). Licensees are sold a territory, just the right to use the brand.
- Franchises maintain control over the franchisee and how they do business with the brand. Licensors do not have this control and only license the ability for the licensee to use the brand.
- Franchising requires registration on a state-by-state basis. Licensee programs are not required to register. (Registration can be very costly and the franchisor must adhere to all specific requirements of each state).
- Both franchise and licensee programs can charge up-front, admin, or royalty fees (or all of the above).
Franchising may be right for you if/when:
- No Real Estate Experience. Some franchisors assist in finding a good retail location. They want you to succeed almost as bad as you do, so many go through in-depth processes to research areas and specific locations to find something that should be a profitable location for you.
- No Industry Experience. Franchisors (usually…should) offer in-depth and all-inclusive training, including manuals and ongoing training, to franchisees about the industry, about running the business, and maintaining the business.
- No Purchasing Experience. Franchisors generally have preferred (sometimes even mandatory) vendors franchisees must use for build-outs, inventory, POS, alarms, etc. If you don’t have experience with researching these companies, it’s nice to have someone who has done that for you.
- No Pricing Experience. If you don’t have any experience with inventory pricing (or how to effectively move inventory), the franchise will likely have everything you need already nailed down.
Licensing may be right for you if/when:
- Have industry experience
- Don’t need a babysitter
- Know how to price your product
- Know how to move inventory, including ordering
- Have connections with companies that provide your inventory, build-out, POS, etc.
I highly recommend speaking with the franchisor or licensor in-depth to find out a few key items that may help you make a decision on which way to go:
1. Pricing – up-front, monthly, residuals/royalty
3. Signage / build-out requirements
4. What exactly will they help you with?
5. What exactly will they provide for you?
6. What control they will have over you and your business?
7. How can you get out of the contract if you ever wanted to (i.e. term requirements)?
This is certainly not an all-inclusive list of questions, but this should get you started. Finding what is right with you and taking your time to make a decision is crucial to making the right decision. Good luck!