Decoding Franchising and Licensing: Which Path is Right for Your Business?
A couple of weeks ago, I got an email from an entrepreneur I did not know personally but had heard about through colleagues. I had been told that she was franchising her business and having great success. I always love to hear about others experiencing success in scaling their business and was excited to see how I could help.
The email read, “We are currently a license, but my mentors and lawyer are recommending switching to franchising ASAP. Was wondering if I could sit down with you to discuss.”
It turns out that she was not franchising at all. When opportunities arise to talk business, you know I’m jumping up, raising my hand, and shouting YES!
We scheduled a 30-minute discovery call, during which I got to listen to some great successes as well as the issues that she was facing due to her current business structure.
When founders and entrepreneurs aspire to expand their business, they often explore different growth strategies, such as franchising, licensing and corporate locations. Each of these methods is effective for scaling a business, but they have distinct differences that can significantly impact the growth trajectory and long-term success of the venture.
The question of which expansion model to choose comes up often, so I felt it was time to shed some light on the subject.
In this blog, we explore the risks and benefits so that you can make an informed decision in your efforts to scale your business!
Understanding Franchising, Licensing, & Corporate Locations
Let’s begin with franchising and licensing. These are both business expansion models that allow entrepreneurs to leverage the success of their brand and products by partnering with third-party individuals or companies. While both methods involve granting rights to use the business's intellectual property, there are key differences that set them apart.
Franchising
Business Model: Franchising is a business model where the franchisor grants the franchisee the right to operate their own business using the franchisor's established brand, products, and systems. The franchisee essentially replicates the franchisor's business under their guidance and support.
Relationship: Franchising typically involves a more hands-on relationship between the franchisor and franchisee. The franchisor provides comprehensive training, ongoing support, and a proven business model to ensure consistent quality and brand representation across all franchise locations.
Control: The franchisor maintains more control over the franchisee's operations, including aspects like branding, marketing, and product offerings. This control is essential to maintain the uniformity and consistency of the brand.
Fees and Royalties: Franchisees pay initial franchise fees and ongoing royalties to the franchisor. These fees contribute to the support and resources provided by the franchisor.
Licensing
Intellectual Property Use: Licensing grants permission to third parties to use the licensor's intellectual property, which may include trademarks, patents, copyrights, or trade secrets. The licensee utilizes the intellectual property to produce and distribute specific products or services.
Business Independence: Licensees operate independently from the licensor and are not subject to the same level of control and involvement as franchisees. The licensor's role is primarily to license the intellectual property and ensure compliance with the terms of the agreement.
Royalties: Licensees typically pay royalties based on sales or a fixed fee for using the licensed intellectual property. Unlike franchising, licensing agreements may not include additional support or training.
Corporate Locations
Unlike franchising and licensing, corporate locations do not require you to partner with third party individuals or companies. In this method, you retain full control and direct profit.
Benefits and Risks of each method
Franchising Benefits
Rapid Expansion: You can grow quickly.
Limited Financial Risk: The franchisee invests in setting up the outlet, reducing the financial burden on the franchisor.
Royalties: Franchisors can earn consistent recurring revenue through royalty fees, technology fees and marketing brand fund fees.
Local Management: Franchisees, being local, often understand their market better and can tailor the outlet accordingly.
Franchising Risks
Brand Control: It may be harder to maintain consistent service and product quality across all franchises.
Revenue Split: A portion of the revenue goes to franchisees.
Potential Conflicts: Differences in interests or goals between franchisors and franchisees may arise.
Legal Risks: Poor franchisee behavior could lead to legal repercussions for the franchisor.
Licensing Benefits
Expansion with Low Investment: Licensors can expand their brand without major investment.
Royalties: Earn revenue through licensing fees.
Flexibility: Licenses can be granted for various products, services, or territories.
Lower Risk: Licensors typically bear less operational risk compared to managing a full business operation.
Licensing Risks
Quality Control: Ensuring consistent product or service quality can be challenging.
Limited Control: Licensors have less operational control over licensed entities.
Reputation: Poor products or services from licensees can harm the original brand's reputation.
Contractual Issues: Ensuring fair and effective licensing agreements can be complex.
Corporate Location Benefits
Full Control: Complete control over operations, brand, service, and product quality.
Higher Profits: All revenues come to the company without sharing with franchisees or licensees.
Brand Consistency: Easier to maintain consistent branding and service.
Direct Management: Can implement strategies and changes without negotiating with external parties like franchisees and licensees.
Corporate Location Risks
High Initial Investment: Significant capital is required to open and operate locations.
Operational Risks: Full responsibility for all business challenges, from human resources to supply chain issues.
Slow Expansion: Opening corporate locations is often slower than franchising or licensing due to the need for significant capital and resources.
Local Market Ignorance: May not have as in-depth knowledge of local markets compared to local franchisees.
Which to Choose?
Your decision depends on your goals, resources, and risk tolerance:
If rapid expansion with limited capital is the goal, franchising might be the way. If you're excited about expanding your brand into various products or regions with a smaller footprint, licensing could be ideal. If brand integrity, control, and capturing full revenues are paramount, then opening corporate locations would be beneficial.
When making your decision, it's crucial to evaluate your company's strengths, weaknesses, and long-term vision. Consulting with professionals, such as business advisors or franchise consultants, can also provide valuable insights.
Shine Lesson Learned
Choosing the right expansion model—franchising, licensing, or corporate locations—requires a deep understanding of your business goals and resources. Carefully evaluate each option to ensure it aligns with your vision for growth and sustainability.
If you’re looking for more personalized feedback regarding which method of growth is right for you and your business, I can help. Sign up for a clarity call with me here. Let's work together to take your business to new places and new heights.
Shine on, Shannon
