Licensing And Franchising, What Is The Difference

Most successfull brands have grown by licencing and franchising. One of the key issues, is how ownership, control and use of the brand can be spread between different businesses.  The FT article, Virgin group: Brand it like Branson, is a fascinating look at some of the hurdles faced by Richard Branson, and provides some revealing information.

For example, the group makes about £120m a year from licensing its brand to other companies.  Some of those companies are publicly concerned about the fact that damage to the brand as a whole, could impact their business, and that they have little power to prevent it.  Virgin America, in its IPO prospectus, explains that:

“The ‘Virgin’ brand is not under our control, and negative publicity related to the Virgin brand name could materially adversely affect our business”

The Virgin brand has been valued at roughly £1bn, and is an excellent case study for anyone hoping to grow their business through licensing and franchising.  However, there is little information available to educate brand owners on how these two strategies differ, and overlap.

There is a world of difference between licensing and franchising but it’s not always easy to distinguish between them. In fact, some “licensing” deals are so close to franchising that they blur the boundary between the two.

The distinction matters because franchising involves a number of formalities. Licensing, on the other hand, is less prescriptive as it covers many possible business arrangements. It enables you to make income from all kinds of intellectual property – your know how, ideas, creative output, reputation, patents, trademarks, designs, and so on.  You can license as much or as little of your business as you like.

To understand the difference between licensing and franchising the starting point is to look at what each term means.

Franchising

Franchising is a way to scale a business once it is successful and proven. It involves finding franchisees with the skills necessary to operate branches of the same business. McDonald’s is one of the best known examples of a business that has grown through franchising. (By contrast, Starbucks has grown by opening its own branches).

You can franchise almost any type of business. Under a franchise, the owner (franchisor) retains control of the brand and licenses (that is, grants permissions to) the franchisee to use its successful business model and brand. In exchange, the franchisee puts up the initial capital for the business, helps to promote the brand and pays a licence fee. The franchisor supports its franchisees by providing training, know how, marketing and other resources and skills.

Licensing of intellectual property (IP) is at the heart of a franchise contract.  So, in fact, a franchise includes licensing. Typically, this will cover know how and other confidential information, trademarks, logos and designs, and copyright materials. For some businesses there may be patents, too.

An essential element of a franchise (and one of the features that distinguishes it from a straight licence) relates to the formalities involved in setting up a franchise, and the degree of control the franchisor retains.

A franchise agreement will usually give the franchisor the ability to control how the business is run. For example, if a customer visits a branch of McDonald’s while on a trip abroad, expecting the familiar service they are used to at home, it is important that they should not be disappointed. Any unpleasant surprises due to changes in the business format could damage McDonald’s brand generally, not just that particular outlet. For that reason, McDonald’s franchise agreement contains strict quality control provisions.

Licensing

The essence of licensing (which is also the basis of franchising) is the owner retaining ownership of its IP while granting others the right to use it.  The terms can vary considerably.

Having said that, some licensing can look a lot like franchising. For example, in the 1850s the inventor of the sewing machine, Isaac Singer, sold licences to entrepreneurs to sell his machines in different parts of the USA. He also offered training in the use of the machines. In this case, the IP licensed was a patent, brand name and know how. Strictly, this was licensing, but it is so similar to what we think of franchising today that some people even consider Singer the father of franchising.

A clearer case of licensing is a car wash that has developed a successful process for getting its customers to opt for hot wax and other optional extras. It might license that process to other car wash businesses in return for royalties. These might be payments each month to use its way of promoting the wax, so that more customers buy it. In this example, the IP being licensed is “know how”.

Another example of licensing is a software licence, such as for Microsoft Office. The software is licensed to you – you do not own anything more than the right to use it. The software is licensed subject to strict terms and conditions.

Brand licensing

If you have built up a brand name, one way to scale your business is to issue a licence to a third party to deliver a related product under your brand name. So, a successful fashion designer might license a perfume manufacturer to create a perfume range for its label.

Another option if you have a successful product or brand, is to grant a license to someone to sell your product under their own brand name. An example is the model Twiggy producing a range of clothes for Marks & Spencer. Similarly, a cook such as Nigella Lawson could grant a licence to a company selling cooking utensils and crockery to use her name on its products. An established licensing model is explained in this article involving Disney’s licences to use its characters (and its brand) on third party merchandise.

Luxury brands are highly sought after for licensing, as their brand brings a cachet to the product to which they lend their name. But brands should beware of veering too far away from their market or offering licences too liberally. Pierre Cardin is a classic example of this. By engaging in indiscriminate licensing, it devalued its brand and lost much of its cachet.

Brand extensions that involve licensing your products or services to different categories are more likely to fail. For instance, Harley Davidson perfume proved to be an extension too far. And despite the fact that Virgin has been able to apply its brand to records, financial services, airlines and a variety of other products and services, it failed in its bid to extend its brand to cola.

Conclusion

Franchising is extremely expensive. So, licensing can be a good way to start if you are interested in franchising your business. Rather than diving straight into franchising with all the due diligence and formalities that it entails, you could start by finding a few licensees who are willing to license some or all of your business model. (Although beware that in some countries, such as the USA, and certain parts of the EU where franchising is heavily regulated, you want to avoid calling what is essentially a franchise a licence. It is unlikely to escape the regulators’ attention.  They will look to the essence of the agreement rather than its name).

Whether you are licensing or franchising, the important thing is to protect your IP. Your brand, patents, know how, trademarks etc. are precious assets, which should not be shared casually. The terms on which you grant licences or franchises need to be carefully considered.