Should I Franchise or License My Business

When you are ready to expand your business, you may start exploring both licensing and franchising as possible growth strategies. However it does not take long before things start getting confusing.

“Should I franchise my business or license my business?”

We hear this question often and it is important that you understand the differences before moving forward.

At The Franchise Maker, we have helped business owners understand the differences between franchising and licensing for decades across a wide range of industries. The right direction for you depends largely on your long-term goals, how much control you want to maintain and how involved you want to remain moving forward.

Quick Answer: What is the Difference Between Licensing and Franchising?

In simple terms, licensing usually means you are allowing someone to use your name, concept or intellectual property with very little ongoing involvement from you.

Franchising, on the other hand, generally means:

you want operators to follow your systems
using your name (brand) consistently
doing things a certain way (operations)
and receiving ongoing coaching, mentorship and support from you

Licensing generally involves:

NO operational control
NO ongoing support
a one-time fee
operators largely run independently

Franchising generally involves:

operational and marketing support
brand consistency
training and processes
ongoing royalties
a level of control over how the business operates

Just because your business can franchise does not necessarily mean it is fully franchise-ready. Likewise, many business owners mistakenly believe they are licensing when legally they are actually operating a franchise relationship.

Teach Them and Turn Them Loose: Licensing

First and foremost you want to think about how you see other people operating your business moving forward.

Let’s say:

you do NOT care what operators call their business
you do NOT care how they run it
and you do NOT plan on collecting any ongoing royalties or providing ongoing support

In this scenario, licensing is your best bet.

In a licensing scenario, you could simply give someone permission to use your name, concept or intellectual property in exchange for a fee. Beyond that, however, they are generally on their own.

Bottom line:

If your goal is simply to train someone to do your business and then you “turn them loose” without any ongoing support or operational control (in other words training your future competition), licensing is your path.

Level of Control: Franchising

Now let’s look at franchising.

Suppose you want:

everyone operating under the same name
consistency in how your products or services are delivered
operators to use specific vendors and suppliers
the operational standards, processes and procedures you developed followed

If everyone is operating your business under the same name and everyone MUST operate their business in a certain way, you are now exercising a level of control (read more about Is Franchising for Control Freaks)!

For example, if you require operators to:

use specific vendors or suppliers
use, offer or sell specific products and services
perform services a certain way
follow specific processes or procedures

then that is considered operational control.

If you also:

collect an upfront fee
collect ongoing royalties exceeding $500 per year
and provide operational and marketing support

then by definition this is a franchise relationship (learn how Franchising is Not a Parent Child Relationship).

What Typically Defines a Franchise Relationship?

A franchise relationship generally includes three primary components:

Required use of your name
Operational and/or marketing support
Collection of upfront frees and ongoing royalties

Marketing support (and this is the tricky one) can be as simple as:

listing locations on your website
providing advertising materials
helping operators market their business

Many business accidentally cross the line into franchising because they are exercising too much control while believing they are “just licensing.” And unfortunately this can lead fines and fees from the different states and lawsuits.

Why Licensing Can Get Business Owners Into Trouble

One of the biggest misconceptions surrounding business expansion is the belief that licensing is automatically easier, safer or less regulated than franchising.

That is not always true.

If you exercise operational control while collecting fees and providing support (operational support or marketing support), governmental agencies may determine that your arrangement legally qualifies as a franchise relationship regardless of what you call it.

We have seen businesses attempt to license and ultimately face:

government scrutiny
fines
litigation
and in some cases bankruptcy

because the arrangement they created was legally considered a franchise (read a horror story about Licensing Gone Wrong).

What Most Business Owners Forget to Ask Before Choosing Between Licensing and Franchising

Many business owners focus heavily on:

expansion speed
startup costs
legal expenses

while overlooking the long-term implications of branding, consistency and what works best given their end game (learn more about “What’s Your End Game Franchising May Play a Role“)

Questions You Should Ask Yourself

Do you want operators using your same name?
Do you want consistency across all locations?
Do you plan on providing ongoing operational guidance?
Do you want recurring royalties?
Do you want to build a long-term brand?
Are you comfortable giving up some control?
Can your processes realistically be duplicated?

These are often the questions that ultimately determine whether licensing or franchising is the better fit for your business.

What’s Right for You Depends on Your Goal

It is really about your end goal and in the long run what you want long-term.

If you goal is to simply:

train operators
collect a one-time fee
and the operators run their business independently

then licensing is your path (although keep in mind you will be training your competition).

However, if instead, you goal is to:

build a recognizable brand
create consistency
maintain operational standards
provide support
scale a network of like-minded operators
and create a chain of businesses (take a look at “Want to Start a Chain Business“)

then franchising is your path for a long-term growth strategy (take a look at the Benefits of Franchising).

Before deciding between licensing and franchising, it is also important to evaluate whether your business is truly franchise-ready and capable of being replicated successfully by others. This is where we step into the picture.

Final Thoughts About Licensing vs Franchising

Licensing and franchising can appear very similar on the surface. However, the level of operational control, support and ongoing involvement dramatically changes how these relationships are viewed legally.

Many business owners unintentionally cross the line from licensing into franchising without realizing it.

That is why your franchise feasibility, operational structure and long-term goals should be evaluated carefully before deciding which direction is right for your business.

(Read more about “Major Differences Between Franchising and Licensing“and this article “Expanding Your Business, What are Your Options“).

If you are not sure whether licensing or franchising is the right fit for your business call The Franchise Maker directly at 1-877-615-5177. We will be more than happy to answer ALL of your questions, explain the differences and help you determine which path aligns with your long-term goals.

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Should I Franchise or License My Business