It is commonsense that everyone going into business would always look for the best business models that will help them grow their business to enviable heights. Taking advantage of a good business structure when building your business is a smart business decision that will ultimately determine how much you will make from the business and how far reaching your business can go.
We have two business growth structure and they are licensing and franchising. These are the business structures that you can access if you want to launch a business or if you want to generate more money for your business.
In order to clearly state which of these business growth structures will be ideal for you, we are going to examine both of them.
What is Business Licensing and What is Franchising?
Business Licensing is a business model that allows entrepreneurs or organizations make use of your business name and/or trademarks for a fee as agreed by both parties. Or better put, it is a written contract in where the licensor (the owner of the company) gives the licensee (an entrepreneur, or business organization) the right to make use of his company’s brand, logo, trade mark, copyright, know-how or intellectual property. It is important to state that the Licensing business model can be very specific or broad in terms of what intellectual properties the licensee can use and how they expect to utilize it.
The business Licensing model is often used for the sale of products and a typical example is when an animation company pays a product company to make use of an image in their cartoon or animation as a character.
In some cases, the business licensing model is used as alternative expansion model to achieve brand awareness and create more marketing channels in order to gain more share of the available market.
Franchising is a business model that allows people to use your business name and business system while paying a fee for it. Franchising basically allows an entrepreneur or a business organization to make use of your name and trademark.
One advantage of adopting the franchising model is that it can be a more cost effective solution to raising bulk capital for a business, it allows operational control for consistency, and it provides a good exit strategy for the business.
The franchising business model also provides a good platform for business expansion, and to grow a business model irrespective of the industry they belong to. You can actually franchise your business if your business falls under the service industry, the fast food restaurant industry, the hotel and lodging industry, the retail industry, the medical and healthcare industry, the manufacturing and distribution industry, and several other industries.
Comparing Business Licensing and Business Franchising
The franchising business model allows the franchisor to dictate the exact methods and systems (such as building style, uniforms, menus (for food related businesses), fit-out and where the business is to be located.
Whilst in the licensing business model, the buyer of the license which is known as the licensees is free to develop their own business model. They are free to choose the building style, uniform and the location they want to operate from, but they cannot alter the logo, trademark or business name of the licensing company.
The franchising business model allows the owner of the company i.e. the franchisor, to effectively monitor the franchisee in the running of the business. As a matter of fact, they go all the way to enforce the performance criteria or quota requirements that the franchisee must meet and maintain.
While in the business licensing model, the buyer of the license (the licensee) is not obliged to meet any requirement criteria or even comply with performance standards from any overseeing organization.
In the franchising business model, the franchisees are expected to pay certain fees, which could include payments to a marketing fund. If you are the owner of a franchise, you are paid a fee, usually an upfront fee, plus an ongoing royalty payment plan that could be a percentage of sales or a fee per product sold et al.
While in licensing business model, the buyer of the business license pays certain fees which is usually one-off and in this case, the owner of the company will not be permitted to operate a marketing fund.
Anyone who buys a franchise from a company is allowed by the agreement to make use of the company’s (the franchisor’s) intellectual property (e.g. trade marks, menus, advertisement jingles, logos and every brand identity).
So also, a Licensee is expected to use the trademarks and intellectual property of the licensor if they so want.
Which is the Best?
The most distinctive feature of a franchising business model is that a franchisor exercises significantly more control over franchisees than a licensor. Unlike in the licensing business model, the franchising business model must contain specific directions on how the buyer of the franchise must operate the business and give detailed specifications on the level and type of marketing that each franchisee must carry out when selling to customers.
If you want to make your choice when it comes to the best business model to build your business on, especially as it relates to generating more income for your business and expanding it, you are expected to critically look at your business vision and mission and of course your overall business plan, then you will be able to make good business decisions that you will be proud of because the choice is entirely yours, and ours is to present the available facts that will help you make informed business decisions.