Franchising vs licensing your business; which is the best option?

  • 20 Mar 2015
  • By Alan Jones
  • Read in 8 Minutes

Tags: business advice, Business Coaching, business growth, franchising, licensing

In todays economy business owners now have the appetite and desire to grow and expand their businesses, we’ve been contacted by several local business owners to do just that – help them expand and grow, during these consultations we’ve been asked about licensing and franchising, these two business models are gaining momentum within SME’s as a golden nugget to growth success!

However there does seem to be some confusion over what they really want as these are very different models. So in this blog I am going to highlight some of the main pros and cons to consider.

Lets start with licensing, put simply licensing is a legal way to lease protected intellectual property to third parties who want to benefit from that IP – it’s a quick and easy way to grow your reach and expand geographically with reduced risk, it allows others to secure a USP and competitive advantage in there chosen market rather than spending money and time building there own USP’s and systems. As a licensee you are leveraging the IP and experiences of the licensor. As a licensor you are leveraging the licensees cash and desires to grow, in turn growing the value of your IP.

So what are the Pros & Cons of this model to the licensor:

Main Pro’s:

1). Low risk geographical expansion strategy.

2). Cost effective growth strategy as the licensee is paying you for the IP and creating greater value in that IP.

3). No long term commitment.

4). Generates a new revenue stream, with little ongoing costs and involvement.

Main Cons:

1). Low degree of commitment from the licensee, cost to sell a license is usually lower than a franchise, and the ongoing passive income is lower.

2). Low level of control over the licensee, so quality may drop impacting your brand.

3). Once they have the IP they can become a competitor by playing with the model. You will lose that IP as its now in the hands of the licensee.

4). Licenses are normally granted to a company – a company with a different name to yours!

5). Ongoing training and partnerships are less likely now they have the IP.

Franchising grants another party the right in a controlled manner the use of its trademarks, branding, systems, processes, products, USP’s etc. within an agreed territory, the franchisee is your representation within a defined region. You have a much tighter controlled grip on the day to day running of the franchise, you remain in control of the brand and IP. You provide ongoing training and support to maintain delivery consistency regardless of region or personnel.

Main Pros:

1). You have greater control over the franchisee, they follow your guidance and do not deviate from the system.

2). Consistency – you can maintain your brand standards and customer journey unlike licensing, they are trading with your brand.

3). Greater upfront income and passive incomes via royalties, easy expansion capital, you are being paid to expand.

4). Controlled procurement process to establish greater buying power driving down costs, and maintaining quality with no cut corners.

5) Greater pool of talent with “skin in the game” they have invested there hard earned cash so need to make it a success.

6). Greater access to cash from banks who lend kindly to franchised businesses.

Main Cons:

1). They are not employees, they are an independent business with potentially different goals and desires – this could create conflict.

2). Cohesive working is an issue, franchisees are not as focused on working in partnership with other franchisees, unlike employed managers who are happy to pull together for a common goal.

3). Innovation is harder to roll out in a franchise model, you need the franchisee to agree to the implementation as there will be a cost associated to that!

4). The power of many, as a franchised business you are forced to listen to your franchisee’s, you have an obligation to ongoing training and development and regular support days which all need to be built into any costs.

5). You earn when they are successful via a % royalty of turnover. So if you implement a way to grow sales which impact profits you will have a conflict of interest!

As you can see there are benefits to both licensing and franchising, be clear on your objectives and consider all the pros and the cons. This may not be the golden nugget for growth and expansion, talk it through and be clear. Whichever direction you choose commit to it and see it through.

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