Difference Between Licensing and

Franchising
Last updated on August 12, 2017 by Surbhi S

Many think that franchising and

licensing are same, but the fact is that they are different, only the
advantages of franchising are similar to those of licensing. The first and
foremost difference between licensing and franchising are that the former is
mainly associated with the production and marketing of goods while the
latter is related to the service business.

When it comes to business expansion, the first thing that strikes our mind
is ‘international business’ a term we hear frequently, but many facts are yet
to be disclosed.

There are several ways of entering the global arena to serve the foreign
market; that helps to earn better returns for the company. This can be done
by transferring skills and product offering, which they acquire from their
unique competencies to the foreign market. The five major ways of entering
a foreign market are exporting, licensing, franchising, forming joint
ventures or establishing a wholly owned subsidiary.

Content: Licensing Vs Franchising

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
BASIS FOR
LICENSING FRANCHISING
COMPARISON

Meaning Licensing is an Franchising is an arrangement

arrangement in which a in which the franchisor permits
company (licensor) sells franchisee to use business
the right to use model or brand name for a fee,
intellectual property or to conduct business, as an
produce a company's independent branch of the
product to the licensee, parent company (franchisor).
for royalty.

Governed by Contract Law Franchising regulations or

Company Law as the case may
be.

Registration Not necessary Mandatory

Training and Not provided Provided

support

Degree of control The licensor has control Franchisor exerts considerable

on the use of intellectual control over franchisee's
property by the licensee, business and process.
but has no control on
the licensee's business.

Process Involves one time Needs ongoing assistance of

transfer of property or franchiser.
rights.

Fee structure Negotiable Standard

Definition of Licensing

By the term licensing we mean a business model in which the licensor

grants the right to use intellectual property, brand or produce a
company’s product to the licensee, for royalty. The licensee company then
makes a huge capital investment to commence its operations.

The greatest advantage of licensing model is that the licensee bears the
developmental cost and the risk associated with launching foreign
operations. In the sphere of high technology, many companies provide
technical know-how through this arrangement like Ranbaxy
Laboratories Ltd. is in search of partners, for out-licensing its diverse
technologies such as respiratory, urology, etc. However, sharing
technological know-how with foreign companies is a bit riskier for
technology-based companies.

Definition of Franchising

We define franchising as a strategy mainly used by service companies, that

allows the franchisee to use a business model, processes or brand name for
a fee, to conduct business, as an independent branch of the parent company
(franchisor).

As in the case of licensing, the franchiser does not bear the development
cost and the risk of commencing operations overseas, because such costs
are expected to be borne by the franchisee only. Hence, by using this
strategy a company can quickly mark its presence globally, at a low cost.
The best examples of this arrangement are McDonald
Restaurant and Kentucky Fried Chicken of United States that entered
India through this strategy.

Although there is a big disadvantage of this arrangement, lack of quality

control, a basic belief of franchising is that the brand name indicates
its quality to consumers. This is due to the geographical distance and the
increased number of franchisees. To overcome this problem franchisers set
up joint ventures or wholly owned subsidiaries to maintain the standard
quality in their products and services.

Key Differences Between Licensing and Franchising

The difference between licensing and franchising can be drawn clearly on

the following grounds:

1. Licensing is an arrangement in which a company (licensor) sells the

right to use intellectual property, or produce a company’s product to
 the licensee, for a negotiated fee i.e. royalty. Franchising is an
arrangement in which the franchisor permits the franchisee to use
business model, brand name or process for a fee, to conduct business,
as an independent branch of the parent company (franchisor).
2. Contract Law governs, licensing whereas franchising is regulated,
franchising regulations in many countries, but in case the franchising
regulations are not in place then the company law regulates.
3. Licensing does not require registration, whereas registration is a
must in the case of franchising.
4. In franchising, complete training and support are provided by the
franchisor to franchisee which is absent in licensing.
5. The licensor has control on the use of intellectual property by the
licensee but has no control over the licensee’s business. However, the
franchisor exerts considerable control over franchisee’s business and
process.
6. In licensing, there is a one-time transfer of property or rights, but in
franchising involves the ongoing assistance of franchiser.
7. A substantial measure of fee negotiation is there in licensing.
Conversely, standard fee structure exists in franchising.
Conclusion

To end up this discussion, there is one more point to unfold, i.e. in general
franchising is comparatively stringent than licensing because
usually, franchisers set strict rules, regarding the operation of the business
by the franchisee.