What's the difference between franchising and licensing? This article compares and contrasts franchisees versus licensees. Offering a franchise subjects the offering party to FTC and state regulations. Licensing doesn't come with as much regulatory baggage, but be careful. Just because you call it a licensing arrangement, it may still actually be a franchise from a legal perspective.
Becoming a small business owner is an exciting transition, especially for ambitious entrepreneurs who have left more traditional career paths.
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The change from employee to owner brings with it new roles and new responsibilities. Possibly for the first time, new business owners now have to deal with issues such as managing employees, maintaining accurate records, and marketing their products. Unless new business owners know what they are getting into ahead of time, their foray into business ownership is likely to be difficult and in many cases, short-lived.
But the challenges of business ownership are multiplied for entrepreneurs who invest in franchises and other business opportunities. They not only have to navigate the waters of owning a business, but also have to understand the additional challenges involved with becoming a franchisee or, in the case of a business opportunity, a licensee.
Many new or prospective business owners mistakenly believe that the words franchisee and licensee are synonymous. They're not! In fact, a misunderstanding of the differences between a franchisee and a licensee can be a recipe for a small business disaster. Knowing the difference is an important first step toward success in your new business venture.
The primary difference between a franchisee and a licensee is that franchisees can expect to have a much closer relationship with their parent company than their licensee counterparts. First and foremost, franchisees typically retain rights to the parent company's trademark and logo. This is important because it is a visible representation of the connection between franchisor and franchisee.
In many ways, franchisees are the public face of the company and so their relationship with the franchisor will be close. For that reason, franchisors usually provide a certain level of training and support to franchisees and their employees. Franchisees can also expect a certain amount of territorial exclusivity as well as controls over the products and services they offer.
The relationship between licensees and the licensing company is looser than the relationship between franchisors and franchisees. In most cases, the licensee does not retain rights to use the company's trademark. Instead, the licensee is expected to establish its own identity in the marketplace.
Similarly, licensees usually don't receive exclusive territorial rights. This means that the licensing company is free to sell similar licenses and products to other people in the same geographic area. Licensees also don't receive much in the way of training or ongoing support from the licensing company.
On the upside, license opportunities are often less expensive than franchises in both the upfront investment and ongoing fees. Once the licensee launches the operation, the relationship with the licensing company is frequently limited to purchasing products whereas franchisees can expect to pay royalties on a go-forward basis.
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