When you are ready to expand, you may investigate both licensing and franchising as possible directions for business growth, but it can get confusing as to how these options differ. “Should I franchise or license my business?” We get this question often and it is critical to understand the differences.
What if…
First and foremost you want to analyze the role of your prospective “buyers” and really consider how you see them handling your business. Let’s say that you do NOT care what these buyers or operators call their business and you do NOT care how they operate it. On top of that, let’s say you also do NOT intend to collect any type of ongoing monies from them. So, basically, you really just want to collect a one-time fee to train them so they can go off and “do it themselves”. In this scenario, licensing may be an option as you can simply give them license for the ability to use your name, but that really would be the extent of it (see more on licensing and how it differs from franchising).
So, to be clear, you could give them permission to use your name to operate their business, but you cannot exercise any control over how they conduct business going forward. Bottom line is if you are simply interested in just training someone on how to do your business and from there, the operator is on his/her own without any further help from you, then this may very well be a licensing arrangement.
Now The Flip Side
Let’s say you want everyone to operate under the same name and everyone MUST operate their business in a certain way. Because everyone MUST operate a certain way, you are now exercising a level of CONTROL (find out if franchising makes sense for control freaks)! For example, if you REQUIRE operators to use specific vendors or suppliers; use, offer and/or sell certain services and/or products, then that is considered control. If you are going to provide these operators with ANY type of marketing or operational assistance, guidelines or support; intend to collect a upfront fee; and collect ongoing payments of more than $500 per year…then YES then by definition this is a franchise relationship (read about franchise relationships).
So a quick overview of a franchise relationship is: 1) the required use of your name; 2) operational and marketing support ; and 3) monies that you collect (i.e. upfront fee and ongoing royalties of more than $500 per year). All of these things indicate that what you want to roll out is a franchise.
Which Fits The Goal?
The most confusing variable in the franchise equation is marketing and operational support. If you want to license your business and simply collect some sort of one-time fee, then go for it (although you may just be training your competition). However, if instead, you really want to brand your business , ensure consistency of your services and/or products being offered and build a culture of like-minded operators, then franchising may be the best option (more on the advantages of franchising).
No doubt there is a fine line between licensing and franchising. We have seen hundreds of businesses attempt to license and fail because they fall under heavy scrutiny with both federal and state government officials resulting in hefty fines, litigation and in some cases bankruptcy because the arrangement they created is really a franchise relationship (read a horror story about what happens when licensing goes wrong). When it comes to business expansion the last thing you want to do is upset governmental officials.
If you are not sure whether to license or franchise your business call us directly at 1-877-615-5177 or send us your contact information. We will be more than happy to answer ALL of your questions (also check out our article that discusses a variety of options you have to grow your business).
