Many think that franchising and licensing are same, but the fact is that they are different, only the advantages of franchising are similar to those of licensing. The first and foremost difference between licensing and franchising are that the former is mainly associated with the production and marketing of goods while the latter is related to the service business.
When it comes to business expansion, the first thing that strikes our mind is ‘international business’ a term we hear frequently, but many facts are yet to be disclosed.
There are several ways of entering the global arena to serve the foreign market; that helps to earn better returns for the company. This can be done by transferring skills and product offering, which they acquire from their unique competencies to the foreign market. The five major ways of entering a foreign market are exporting, licensing, franchising, forming joint ventures or establishing a wholly owned subsidiary.
Content: Licensing Vs Franchising
Comparison Chart
| Basis for Comparison | Licensing | Franchising |
|---|---|---|
| Meaning | Licensing is an arrangement in which a company (licensor) sells the right to use intellectual property or produce a company's product to the licensee, for royalty. | Franchising is an arrangement in which the franchisor permits franchisee to use business model or brand name for a fee, to conduct business, as an independent branch of the parent company (franchisor). |
| Governed by | Contract Law | Franchising regulations or Company Law as the case may be. |
| Registration | Not necessary | Mandatory |
| Training and support | Not provided | Provided |
| Degree of control | The licensor has control on the use of intellectual property by the licensee, but has no control on the licensee's business. | Franchisor exerts considerable control over franchisee's business and process. |
| Process | Involves one time transfer of property or rights. | Needs ongoing assistance of franchiser. |
| Fee structure | Negotiable | Standard |
Definition of Licensing
By the term licensing we mean a business model in which the licensor grants the right to use intellectual property, brand or produce a company’s product to the licensee, for royalty. The licensee company then makes a huge capital investment to commence its operations.
The greatest advantage of licensing model is that the licensee bears the developmental cost and the risk associated with launching foreign operations. In the sphere of high technology, many companies provide technical know-how through this arrangement like Ranbaxy Laboratories Ltd. is in search of partners, for out-licensing its diverse technologies such as respiratory, urology, etc. However, sharing technological know-how with foreign companies is a bit riskier for technology-based companies.
Definition of Franchising
We define franchising as a strategy mainly used by service companies, that allows the franchisee to use a business model, processes or brand name for a fee, to conduct business, as an independent branch of the parent company (franchisor).
As in the case of licensing, the franchiser does not bear the development cost and the risk of commencing operations overseas, because such costs are expected to be borne by the franchisee only. Hence, by using this strategy a company can quickly mark its presence globally, at a low cost. The best examples of this arrangement are McDonald Restaurant and Kentucky Fried Chicken of United States that entered India through this strategy.
Although there is a big disadvantage of this arrangement, lack of quality control, a basic belief of franchising is that the brand name indicates its quality to consumers. This is due to the geographical distance and the increased number of franchisees. To overcome this problem franchisers set up joint ventures or wholly owned subsidiaries to maintain the standard quality in their products and services.
Key Differences Between Licensing and Franchising
The difference between licensing and franchising can be drawn clearly on the following grounds:
- Licensing is an arrangement in which a company (licensor) sells the right to use intellectual property, or produce a company’s product to the licensee, for a negotiated fee i.e. royalty. Franchising is an arrangement in which the franchisor permits the franchisee to use business model, brand name or process for a fee, to conduct business, as an independent branch of the parent company (franchisor).
- Contract Law governs, licensing whereas franchising is regulated, franchising regulations in many countries, but in case the franchising regulations are not in place then the company law regulates.
- Licensing does not require registration, whereas registration is a must in the case of franchising.
- In franchising, complete training and support are provided by the franchisor to franchisee which is absent in licensing.
- The licensor has control on the use of intellectual property by the licensee but has no control over the licensee’s business. However, the franchisor exerts considerable control over franchisee’s business and process.
- In licensing, there is a one-time transfer of property or rights, but in franchising involves the ongoing assistance of franchiser.
- A substantial measure of fee negotiation is there in licensing. Conversely, standard fee structure exists in franchising.
Conclusion
To end up this discussion, there is one more point to unfold, i.e. in general franchising is comparatively stringent than licensing because usually, franchisers set strict rules, regarding the operation of the business by the franchisee.
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