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Franchise vs License: A Comparative Study

In this informative post, we have stated all the deets you need to know about Franchise and License, along with a comparative study on both the business models. Continue reading to learn more

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Franchise and License have been standard expansion options for numerous business owners in recent times. If you are reading this post, you are probably an entrepreneur looking to generate money, diversify your income, planning to retire early, etc. These two terms are frequently used interchangeably when selling or promoting a product whose value (brand) isn’t normally held by the seller.

Franchise and License can assist you in reaching your goals. It might be difficult to decide whether to get into a license agreement or a franchise deal. Before making any significant business choice, it’s critical to conduct due diligence. 

Franchise and license are basically two forms of commercial contracts that permit a company to utilise its technology, business systems, and trademarks for price. So, which is the best bet for you? Let us tell you that there’s a very delicate line exists between the two business models. Today, we’ll look at the distinctions between franchise and license to resolve your doubts.

Franchise: What Is It?

A franchise is a contract between two parties in which one party (hereinafter known by the name of ‘franchisor’) allows another party (hereinafter known by the name of ‘franchisee’) to utilise its business model or brand name in order to conduct business being an independent franchisor branch for a fee.

The finest instances of the franchise are Kentucky Fried Chicken (KFC) and McDonald’s, both of which set their foot in India using this technique. 

Advantages of Franchise

There are various advantages to the franchise. It widens your consumer base while retaining your brand value being the franchisor. Another advantage is that the franchisee pays for the expense of modernising their company premises in order to suit the brand’s requirements. In exchange, the franchisee receives priceless mentoring. Doesn’t that appear like a well-balanced situation?

Disadvantages of Franchise

To become a prosperous franchise, a company should be well-established first with a cutting-edge business strategy as well as a recognisable, robust brand.

License: What Is It?

A License is a contract between two parties in which one party (hereinafter known by the name of ‘licensor’) offers (sells) the other party (hereinafter known by the name of ‘licensee’) the brand rights to utilise the licensor’s intellectual property or produce the products of the licensor.

Many high-tech organisations give technological know-how via license, such as Ranbaxy Laboratories Ltd., which is looking for partners to out-license its different technologies like urology, respiratory, and so on.

Advantages of License

A license contract is often simpler and less expensive to establish compared to a franchise idea. In addition, ongoing management is less onerous.

Disadvantages of License

Nevertheless, you’re dropping off heaps of control regarding the product and service quality provided by the licensee, which might harm your brand name. So, what is the difference if they require paying for the usage of information?

DRAFT YOUR FRANCHISE AGREEMENT NOW

Franchise vs License: Explained

Despite their similar definitions, there exist significant variations between franchise and license.

  • Business Model

Business model is the first distinguishing factor. A franchise is exclusively concerned with the delivery of a service, whereas a license might include products and services. A salon or restaurant, for instance, maybe franchised, not the items they use in order to perform the services.

  • Influence and Control

There’s the issue of how much power each party has. The franchisor has a large effect on how the franchisee operates the business through franchising. It implies that the franchisor has complete control over critical choices like service quality and marketing strategy. In terms of decision-making, the franchisee has minimal leeway. However, under a license, the licensee is free to decide what they can do with their services and products without seeking permission from the licensor.

  • Assistance

Another distinguishing feature is the methods employed. The franchisor (in franchising) assists the franchisee in building up the necessary systems. Typically, license contracts don’t include such technical help.

  • Proprietorship

The fourth distinction concerns proprietorship. The franchisee owns the business in a franchise agreement. The franchisee manages the franchisor’s business, but for a charge. A licensing partnership requires the licensee to pay the licensor solely for a particular product in which the licensor might’ve obtained patent rights. Nevertheless, the remainder of the firm, which does not require the licensor’s goods, might continue to operate independently.

  • Regulations

Lastly, franchise requirements are more stringent. Company law governs franchise restrictions. License requirements, on the other hand, are controlled by contract law.

Which Is Better for You: Franchise or License?

In the franchise and license argument, your decision is based solely on your wishes and requirements as a business owner. To determine which sort of company structure is best for you, ask yourself a handful of essential questions:

  • Do you think the laws of security that apply to franchisees are onerous?
  • Does the franchise you are thinking about buying have a track record of prosperity?
  • Are you seeking a more straightforward way to get started in a company with fewer needs? If this is the case, a license contract is usually considerably simpler to complete compared to a franchise deal.
  • Do you like more control over your business’s management? If this is the case, a license is once again the superior option. If you appreciate having numerous aspects of your business that are pre-planned for you, consider a franchise.

Each business has unique obstacles. Consider the advantages and disadvantages of your goals, circumstances, goods, and personality while deciding between franchise and license. Also, do not forget to consider your existing resources before selecting.

Conclusion

The distinction between franchise and license is exceedingly fine and is defined by the degree of control established by the underlying contract.

Despite the fact that both have identical benefits, a license is a subset of a franchise; for example, a normal franchise structure might include many licensing contracts in order to transfer IP (intellectual property) rights. Nevertheless, because of the franchisor’s larger degree of control, a franchise is a considerably broader idea.

Which form is preferable depends on the product or service’s nature, the risk appetite of the franchisee or licensee, the competition’s existence in the market, the possibility for new players to set foot and sustain the market, and the amount of investment needed, and so on.

Overall, both kinds of businesses are rather secure and legitimate since they are founded on the firm establishment of the brand value related to the product. Furthermore, it may be utilised as a springboard for any possible new entrant to enter an already crowded industry. You can reach out to vakilsearch for any of your queries.

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