There is a lively debate about the differences between licensing and franchising. That makes it often hard to understand. The main differences most agreed on can be found here.
Before turning to the differences between licensing and franchising, we should take a closer look at the definitions of the two concepts. Both concepts are ways in which the firm can establish business in other markets and therefore entry modes.
Under licensing, the licensor gives a right to the licensee against payment, e.g. a right to manufacture a certain product based on a patent against some agreed royalty.
Under franchising, the franchisor gives a right to the franchisee against payment, e.g. a right to use a total business concept/system, including the use of trade marks (brands), against some agreed royalty.
Thus, already at this stage it is important to understand that licensing is usually only about one aspect of the business: only the product. Franchising, however, encompasses the whole business format. This package can contain items such as trade marks and trade names, copyright, designs, patents, trade secrets, business know-how, store design etc.
Differences between Licensing and Franchising
We will now turn to the differences between licensing and franchising. After having clarified what these two concepts actually mean, one can also understand how licensing and franchising differ. The main differences are summarized in the following table:
| Factor | Licensing | Franchising |
| Terminology | The term royalties is normally used. | Management fees is considered as the appropriate term. |
| Element | Products, or even a single product, are the common element. | Covers the total business format, including know-how, intellectual rights, goodwill, trade marks and business contacts. Franchising is all-encompassing, whereas licensing concerns just one part of the business. |
| Business situation | Licenses are usually taken by well-established businesses. | Tends to be a startup situation, certainly as regards the franchisee. |
| Duration | Terms of 16-20 years are common (particularly where they relate to technical know-how, copyright and trade marks). The terms are similar for patents. | The franchise agreement is normally for 5 years. Sometimes it is extended to 11 years. Franchises are frequently renewable. |
| Selection of partner | Licenses are usually self-selecting. They are often established businesses and can demonstrate that they are in a strong position to operate the license in question. A licensee can often pass its licence on to an associate or sometimes unconnected company with little or no reference back to the original licensor. | The franchisee is very definitely selected by the franchisor. Its eventual replacement is controlled by the franchisor. |
| Research | Usually concerns specific existing products. Thus, very little benefit from ongoing research is being passed on by the licensor to its licensee. | The franchisor is expected to pass on to its franchisees the total business format, including benefits of ongoing research programmes as part of the agreement. |
| Goodwill | There is no goodwill attached to the licence as it is totally retained by the licensor. | Although the franchisor does retain the main goodwill, the franchisee picks up an element of localized goodwill: he invests more for the business format than the assets received are actually worth, as intangible assets not shown on the balance sheet are likewise part of the agreement. |
| Negotiation | Licensees enjoy a substantial measure of free negotiation. They can use their trade muscle and their established position in the marketplace as bargaining tools. | There is a standard fee structure. Any variation within an individual franchise system would cause confusion and is therefore usually not applicable. |