Finding the Right Fit – Franchising vs. Licensing

A client in the fitness business is currently trying to uplevel and scale her business. She has been in the business for about 5 years and has secured intellectual property rights in a certain type of fitness methodology and brand. One way to grow her business would be through franchising. Or as I suggested, licensing.

A lack of capital is the most common barrier to business expansion. Taking on debt, paying interest on the debt, or inviting investors in exchange for equity are all barriers to expansion. Franchising and licensing can help overcome these barriers. They allow businesses to contract or license their brand in exchange for a fee and a portion of the profits.

Franchising does come at some cost to a business owner. The first thing that a franchisor needs to invest in is marketing. The brand has to be famous enough for people to want to invest in the buying the franchise. Think MCDonald’s, KFC, UPS etc. In addition, a franchisor needs to budget for business planning, financial analysis, legal documentation and training. It could take years for an entrepreneur to be ready to be a franchisor.  

Licensing, on the other hand, may be a more feasible option for small businesses. While licensors would need to budget for marketing, a smaller investment is required from licensees, making it a more attractive business proposition.  

So what is the difference between franchising and licensing? Each model has its own strengths and are designed to help entrepreneurs expand without the cost of equity. Here are the key differences between franchising and licensing:

 

FRANCHISING LICENSING
1. Franchisor has more control over franchisee, dictating the location, construction, class format, methodology (all for a fitness business). 1. Licensor usually does not exercise control over a licensee. Licensor simply provides the right to use the fitness methodology or other intellectual property right to the licensee.
2. Franchisees typically have to invest a larger sum of money in order to purchase a franchise and fulfill the strict franchising requirements. In addition to the initial investment, there is a high franchise fee that is payable by the franchisee. 2. Licensees do not need to make a large initial investment and is more affordable to licensees than franchising.
3. Franchises are required to follow strict Federal Trade Commission regulations and adhere to federal and state laws. 3. There is no regulation governing licensing and there are fewer restrictions.
4. Franchisor must have written rules and procedures for the franchisee to follow. 4. Licensing is more flexible and does not require written rules and procedures.

Licensing can sometimes cross over into the franchising territory if entrepreneurs don’t exercise caution. Always get the help of a lawyer to help you navigate the process of franchising and licensing.

At Nupur Shah Law, we help entrepreneurs grow and scale their business. Call us at 646-820- 1366 or email us at nupur@nupurshahlaw.com. I am happy to have a complimentary conversation with you on how to secure and/or defend your rights.

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