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Franchising v. Licensing

In commercial real estate, it’s common to see those around you considering whether they should opt to go down a path of licensing, or franchising. This could be from the end of someone wanting to buy into a franchise or obtain licensing agreements, or perhaps on behalf of your own business, and whether you should agree to one or the other with interested parties. Should you be considering either of these options either in the immediate future or further along down the line, it’s important to understand the key differences.

A license is where the licensor allows the other party (the licensee) “the right to use or benefit from a trademark, technology, or other legal rights.” An example of this could be a media company (such as Disney, Cartoon Network, etc) allowing a fast food company to use one of their trademarks for a limited period, such as with the toys that go inside the kids meals. Licensing grants a limited right, and the licensor has final say over what the licensee can use their trademark/technology/formula etc for. The licensor does not have control or say over what the business of the licensee does, only over how their own asset is being used by that company.

A franchise however, is when the original owner (Franchisor) allows someone else to “develop, establish, and duplicate” the business of the original. This person is the franchisee. A franchise is a legal, commercial relationship, where the franchisee is provided with products or services by the franchisor, and uses the same trademarks and logos as the franchisor. When people think of franchises, the first example to come to mind is fast food. They share the same products, logos, and trademarks, but are owned by different franchisees, rather than all of them being solely owned by the franchisor.

When choosing between licensing a trademark/logo/technology or opting to become a franchisee, consider the following:

  • When licensing, royalty fees are ongoing, in franchising these are paid upfront

  • Licensees can usually negotiate the terms of their contract, franchisors allow term negotiation only sometimes

  • Some states require franchisors to register their Franchise Disclosure Document before selling a franchise there, so it gives the franchisee “an extra layer of protection”, but not all states do

  • Licensing is covered by the Consumer Protection Act

  • Licensing is a limited relationship, franchising is extensive and often includes licensing

When making this decision, no matter which side you fall on (the licensor/licensee or the franchisor/franchisee) it’s worth it to look over the list of what each option offers, and see how they align with your short and long term goals. If you only need use of a certain software, look at the benefits of what being part of a franchise can offer, but if their business isn’t something you’d like to model yours after, consider just licensing. But, if you find yourself eyeing the appeal of the support system that comes with a franchise, and you don’t mind adhering to their guidelines, franchising may be the right choice for you.