Licensing vs. Franchising
Jan. 26, 2023
Most people are familiar with what a franchise is. Every time someone visits a McDonald’s or a 7-Eleven, they are patronizing a franchise, and they know it by the familiarity of the product offerings and the general look and feel of the operation—not only its physical layout but also its use of logos and other symbols or sayings.
However, when people buy a Disney-related product—say, a watch with Mickey Mouse on it— they probably won’t give a second thought to its origins. Disney made it, right? Not necessarily, since the Disney Corporation licenses the use of its characters to different companies around the world.
Disney and McDonald’s are relying on two different business concepts to expand their empires. When Ray Kroc bought a lone McDonald’s fast-food restaurant in San Bernardino and then started franchising it, that was one model. When Walt Disney created Mickey Mouse, he not only featured the character in cartoons and other ventures such as Disneyland, but he and his successors also began licensing the image of its characters for use by other businesses.
A franchisor exerts great control over the day-to-day operations of its franchised outlets, but a licensor such as Disney will usually strike a one-time deal with another business for the use of its idea, design, name, or logo. The licensee will have to agree to certain permitted uses but is then on their own. A franchisee, in contrast, will be required to run its business pretty much as mandated by the franchisor.
If you’ve developed a business that you would like to grow and expand, you are then faced with two solid choices: start a franchise, or license what you’re doing to others. There are pros and cons to each.
For an analysis of which option best suits your business, contact the franchise and small business attorneys at Bundy & Fichter PLLC. Based in Seattle, the firm serves clients throughout the United States, including Oregon, Texas, and Florida.
Pros and Cons of Franchising
If you franchise your business, you not only retain the right to essentially dictate how your franchisees run their businesses, but you also get to charge royalties on sales, as well as fees for advertising and marketing. However, you must have a solid business model that can be replicated, and many of the most successful franchises even have training programs in place, such as McDonald’s famous Hamburger U.
In other words, as a franchisor, you’re going to need to have a highly efficient and professional operation of its own to serve your franchisees and their needs. You also are going to have to meet certain regulations and legal obligations. Franchisors are regulated by the Federal Trade Commission (FTC) and sometimes at the state level as well.
A franchisor is required to develop a 23-part Franchise Disclosure Document (FDD) to give to its potential franchisees. Developing one can be a complicated, complex project requiring the assistance of attorneys and accountants. This is a major requirement for starting a franchise. You will also have to create, with legal assistance, a franchising contract that spells out everyone’s rights and obligations.
Finally, once you franchise your business, your obligations don’t end there. You must make sure each franchisee is adhering to the rules set forth in the contract. You must also provide support when a franchise has a question or runs into a problem. After all, you have to ensure your brand name and image are maintained.
Pros and Cons of Licensing
Disney is one example of licensing the core of its business to others while retaining use of what it licensed out: its characters’ images.
Most people probably don’t realize it, but Calvin Klein is also a licensor. Outside of one brand of women’s wear that Calvin Klein still designs and makes in-house, all other Calvin Klein products— perfumes, jeans, and even underwear—are developed by licensees. Even the Girl Scouts licensed out their cookie empire to local bakers around the country.
One major difference between a franchisor and a licensor is the amount of control the originator has. A franchisor sets standards and limitations on its franchisees and then enforces them. A licensor will likewise set limitations on the use of its name, product, design, or image, but will then step back in favor of an ongoing licensing fee, generally five percent of gross, according to one survey.
While a franchise is subject to federal regulation and requirements, a licensor is essentially just signing contracts with others. There are not as many regulatory hoops to jump through.
Which One is Right for You: Franchisor or Licensor?
A franchise is a complicated path to follow, from meeting regulatory standards to providing ongoing support to overseeing the franchisees of your business. Starting up and running a franchise can involve many hours of preparation but also the costs associated with those hours of preparation. In the end, though, you retain control of your business and receive an endless stream of payments and fees from your franchisees.
If you wish to license your business, the path is less strewn with obstacles—no FDD, for instance, and there’s probably no need for ongoing support. A licensee is typically on their own so long as they adhere to the terms of the contract and pay their royalty fee. The licensee also assumes the risk that comes with operating a business on their own. You generally won’t have to rush in and save them if things go wrong, but you have to be careful they don’t damage your image or reputation.
Reach out to Experienced Attorneys
Before jumping into franchising or licensing, make sure you run your ideas and goals by an experienced attorney. The franchise and small business attorneys at Bundy & Fichter PLLC have been helping small business owners enter into the franchise world or otherwise expand and profit from their operations for decades. Reach out to the firm with your questions and concerns about franchising vs. licensing. The team will provide the answers tailored to your unique circumstances.