License or Franchise a Business - Sherpa Group examine the differences

Sherpa Group  is often asked “What is the difference between licensing and franchising?” “Should I license or should I franchise?

On a general level, licensing and franchising both deal with the selling of certain intellectual properties to third parties, whether it is software, trademark, or a business process. However franchising has a greater deal of control by the owner/franchisor than a license, albeit under the watchful eye of the ACCC.

For a business that is seeking to grow their brand across Australia and potentially overseas, franchising offers a methodology that allows the business to reach a large size in a relatively short time period due to:

• Efficient leveraging of IP and systems 
• Fast growth with less risk and less of the businesses own funds and sales representatives 
• Learning from talented group of franchisees 
• Accessing difficult local markets and increase buying power 
• Sharing success with many others 
• Increased marketing spend and power 
• Increased brand strength and viability 
• Substantial financial rewards after critical mass for stakeholders

Licensing is a business structure and method of distributing goods and services. In most cases, the licensee does not retain rights to use the company’s trademark and licensees usually don’t receive exclusive territorial rights.

The licensing company is often free to sell similar licenses and products to other people in the same geographic area. Licensees don’t usually receive much in the way of training or ongoing support from the licensing company. On the other hand, license opportunities are often less expensive than franchises in both the upfront investment and ongoing fees. The major negative aspect of licensing is a lack of control over licensees to get them to follow crucial systems such as sales techniques that eventually hinder the success of the operator.

Businesses should be aware of their crucial success factor within their business. For instance, if it is critical in the way in which the business responds to client enquiries and then service clients every time, to duplicate this level of service would usually require comprehensive training and strict compliance to business systems. This would not normally occur within a licensing relationship.

Numerous companies use the franchise framework to underpin their business model and call themselves licensors. This is certainly acceptable but they would need to be mindful as the Franchising Code of Conduct specifically defines a structure as a franchise if it contains all of the following elements: 

• An agreement between the parties, written or oral (Contract) 
• A payment, either up-front or ongoing for the provision or goods or services, (except at wholesale price) 
• Provision of a marketing plan substantially determined, controlled or suggested by the franchisor (Control)
• Use of Trademarks, Brands or Names owned by the franchisor

Sherpa Group licence and franchise consultants offer franchise advice and can assist with assessing the best model for businesses. 

Contact Sherpa Group to find out more and receive a free Sherpa Guide which includes helpful tips on starting a franchise or buying a franchise.