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In licensing, the licensor gets the advantage of entering the international market at little risk. However, the licensor has little to no control over the licensee, in terms of production, distribution and sales of the product. In addition to this, if the licensee gets success, the firm has given up profits, and whenever the licensing agreement expires, the firm might find that it has given birth to a competitor.
As a prevention measure, there are certain proprietary product components supplied by the licensor itself. Although, innovation is considered as the appropriate strategy so that the licensee will have to depend on the licensor.

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The term ‘franchise‘ is understood as an exclusive right conferred by the parent organization to an individual or enterprise to use the former’s successful business model, in stipulated areas. Franchising is a business relationship; wherein the owner authorizes another party to use their brand, product, business system and process in return for adequate consideration.

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In finer terms, franchising is an arrangement, in which the manufacturer, permits another firm, the right to use its diverse intellectual property rights such as trademark, brand name, technical know-how, designs, etc., in addition to the proven name, goodwill and marketing strategies, for a certain sum. E.g. Mc Donald’s, Subway, & Eleven, Domino’s, Dunkin’ Donuts, etc.

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Licensing is defined as a business arrangement, wherein a company authorizes another company by issuing a license to temporarily access its intellectual property rights, i.e. manufacturing process, brand name, copyright, trademark, patent, technology, trade secret, etc. for adequate consideration and under specified conditions.
The firm that permits another firm to use its intangible assets is the licensor and the firm to whom the license is issued is the licensee. A fee or royalty is charged by the licensor to the licensee for the use of intellectual property right.

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The overseas company enters into a licensing agreement with another company based in the domestic country, for a specified period of time. The two primary reasons for entering in the licensing agreement are:

International expansion of a brand franchise.

Need for commercialization of new technology.

Generally, a firm opts for license its products, when the firm holds that the consumer’s acceptance of the product is high. It helps the licensee to differentiate the product from other products offered by the competitors in the market. Further, it also assists the licensing company in reaching new customers at a low price.

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In franchising, the firm that grants a license is called franchiser, and the individual or entity to whom the right is conferred is franchisee. The franchisee acquires franchise by paying initial startup and annual licensing fees to the franchiser, who in return provides training and assistance to the franchisee at regular intervals.

Franchising Agreement is a special agreement between both the parties, under which rights are given, and also the terms and conditions relating to franchising are stated clearly.

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1. License: The franchisee gets the right to use, franchiser’s trademark under a license.
2. Policies: The franchisee must follow the policies concerning the mode of conducting business, as stated in the agreement.
3. Marketing support and technology: Franchisee is supplied with continuous market support and technology, by the franchiser, to undertake business, in the manner stated in the franchising agreement.
4. Training: Complete training and assistance are provided to the personnel working in the franchisee’s enterprise.
5. Royalty: For making use of a well-known business model, the franchisee pays the royalty to the franchiser.
6. Limited period: Franchisee is allowed to use the business know-how and brand name for a specified period, as mentioned in the franchise agreement. Although, the agreement can be renewed further.

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1. It allows franchiser to augment his distribution chain in minimum time.
2. It provides feedback to the franchiser regarding the product popularity, needs and choices of customers, etc.
3. It expands the network of franchiser which helps in increasing goodwill.
4. As the business is already established, the franchisee need not make efforts in promoting the product.
5. Franchisee get sole rights in providing the product or service

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The basic definition of trademark licensing is rather straightforward, if somewhat legalistic. A license is an agreement through which a licensee leases the rights to a legally protected piece of intellectual property from a licensor — the entity which owns or represents the property — for use in conjunction with a product or service.

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What is Licensing | Licensing International

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Licensing advantages and disadvantages both are offered when it comes to generating revenue from your product, idea, or service. On one hand, it represents a highly passive and potentially lucrative income stream, making it an enticing option for entrepreneurs seeking to monetize their creations. In fact, it has the potential to be one of the fastest routes to amassing significant wealth.

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10 Licensing Advantages and Disadvantages

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Discover licensing advantages and disadvantages, and maximize your revenue potential with informed decisions on licensing products, ideas, or services.

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1. A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee.
2. The franchisor is the business that grants licenses to franchisees.
3. The Franchise Rule requires franchisors to disclose key operating information to prospective franchisees

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What Is a Franchise?

A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.

Key Takeaways

Understanding Franchises

When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark.

Franchises are a popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food. One big advantage to purchasing a franchise is you have access to an established company's brand name. You won't need to spend resources getting your name and product out to customers.

The franchise business model has a storied history in the United States. The concept dates to the mid-19th century when two companies-the McCormick Harvesting Machine Company and the I.M. Singer Company-developed organizational, marketing, and distribution systems recognized as the forerunners to franchising. These novel business structures were developed in response to high-volume production and allowed McCormick and Singer to sell their reapers and sewing machines to an expanding domestic market.

The earliest food and hospitality franchises were developed in the 1920s and 1930s. A&W Root Beer launched franchise operations in 1925. Howard Johnson Restaurants opened its first outlet in 1935, expanding rapidly and paving the way for the restaurant chains and franchises that define the American fast-food industry until this day.

There were 790,492 franchise establishments in 2022 that supported the U.S. economy, with an expected 805,436 for 2023. These franchises contributed over $500 billion to the economy. In the food sector, franchises included recognizable brands such as McDonald's, Taco Bell, Dairy Queen, Denny's, Jimmy John's, and Dunkin'. Other popular franchises include Hampton by Hilton and Days Inn, as well as 7-Eleven and Anytime Fitness.

Franchise Basics and Regulations

Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales.

A franchise contract is temporary, akin to a lease or rental of a business. It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract.

In the U.S., franchises are regulated at the state level; however, the Federal Trade Commission (FTC) established one federal regulation in 1979. The Franchise Rule is a legal disclosure a franchisor must give to prospective buyers. The franchisor must fully disclose any risks, benefits, or limits to a franchise investment.

This information covers fees and expenses, litigation history, approved business vendors or suppliers, estimated financial performance expectations, and other key details. This disclosure requirement was previously known as the Uniform Franchise Offering Circular before it was renamed the Franchise Disclosure Document in 2007.

Advantages and Disadvantages of Franchises

Advantages

There are many advantages to investing in a franchise, and also drawbacks. Widely recognized benefits include a ready-made business formula to follow. A franchise comes with market-tested products and services, and in many cases established brand recognition.

If you're a McDonald's franchisee, decisions about what products to sell, how to layout your store, or even how to design your employee uniforms have already been made. Some franchisors offer training and financial planning, or lists of approved suppliers. But while franchises come with a formula and track record, success is never guaranteed.

Disadvantages

Disadvantages include heavy start-up costs as well as ongoing royalty costs. To take the McDonald's example further, the estimated total amount of money it costs to start a McDonald's franchise ranges from $1.3 million to $2.3 million, on top of needing liquid capital of $500,000.

By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.

For uprising brands, there are those who publicize inaccurate information and boast about ratings, rankings, and awards that are not required to be proven. So, franchisees might pay high dollar amounts for no or low franchise value.

Franchisees also lack control over territory or creativity with their business. Financing from the franchisor or elsewhere may be difficult to come by. Other factors that impact all businesses, such as poor location or management, are also possibilities.

Franchise vs. Startup

If you don't want to run a business based on someone else's idea, you can start your own. But starting your own company is risky, though it offers rewards both monetary and personal. When you start your own business, you're on your own. Much is unknown. "Will my product sell?", "Will customers like what I have to offer?", "Will I make enough money to survive?"

The failure rate for new businesses is high. Two-thirds of businesses survive just two years, and 50% survive just five years. If your business is going to beat the odds, you alone can make that happen.

To turn your dream into reality, expect to work long and hard hours with no support or expert training. If you venture out solo with little or no experience, the deck is stacked against you. If this sounds like too big a burden, the franchise route may be a wiser choice.

People typically purchase a franchise because they see other franchisees' success stories. Franchises offer careful entrepreneurs a stable, tested model for running a successful business. On the other hand, for entrepreneurs with a big idea and a solid understanding of how to run a business, launching your own startup presents an opportunity for personal and financial freedom. Deciding which model is right for you is a choice only you can make.

What Are the Advantages of Franchises?

Some of the widely recognized advantages of franchises include a ready-made business formula to follow, market-tested products and services, and, in many cases, established brand recognition. For example, if you're a McDonald's franchisee, decisions about what products to sell, how to layout your store, or even how to design your employee uniforms have already been made. Some franchisors offer training and financial planning, or lists of approved suppliers; however, despite these benefits, success is never guaranteed.

What Are the Risks of Franchises?

Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.

There is also the risk of a franchisee being duped by inaccurate information and paying high dollar amounts for no or low franchise value. Franchisees also lack control over territory or creativity with their business. Financing from the franchisor or elsewhere may be difficult to come by and franchisees could be adversely affected by poor location or management.

How Does the Franchisor Make Money?

Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales.

The Bottom Line

A franchise can be a great way for an individual to enter the world of entrepreneurship, as the majority of the groundwork has already been laid and you are leveraging off an established, successful, and well-known business and brand name. There are also many businesses with franchises to choose from.

For a fee and start-up costs, you can be on your way to being your own boss and entering a possibly lucrative career. Though it must be noted that success is not guaranteed and franchises require a lot of work to be profitable.

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What Is a Franchise, and How Does It Work?

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A franchise is a business whereby the owner licenses its operations-along with its products, branding, and knowledge-in exchange for a franchise fee.

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1. A manufacturer-to-retailer arrangement – as occurs with car vehicle dealerships. The franchisor supplies the dealership (retailer) with vehicles.
2. A manufacturer-to-wholesaler arrangement – common with soft drinks companies. The franchisor grants the franchisee a license to manufacture and distribute its product(s). This kind of franchise is common when the franchisee is in another country.

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3. A wholesaler-to-retailer arrangement – the franchisor (wholesaler) sells products to the franchisee (retailer) who sells them to the general public. This kind of arrangement is common in cooperatives, where the franchisee is, in fact, part of the cooperative (the cooperative is the franchisor).
4. A retailer-to-retailer arrangement – the “classic” business format franchise. The franchisor markets a product (or service) through a network of franchisee retailers.

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Advantages of franchising for the franchisee

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Advantages of franchising for the franchisee

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1. Business assistance

One of the benefits of franchising for the franchisee is the business assistance they receive from the franchisor.

Depending on the terms of the franchise agreement and the structure of the business, the franchisee might receive essentially a turnkey business operation. They may be provided with the brand, the equipment, supplies, and the advertising plan—essentially everything they need to operate the business.
2. Brand recognition

A big benefit that franchisees receive when opening a franchise is brand recognition. If you start a business from scratch, you would have to build your brand and customer base from the ground up, which would take time.
3. Lower failure rate

In general, franchises have a lower failure rate than solo businesses. When a franchisee buys into a franchise, they’re joining a successful brand, as well as a network that will offer them support and advice, making it less likely they’ll go out of business.

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4. Buying power

Another benefit of franchising is the sheer size of the network. If you’re operating a standalone business and need to order products or supplies to make your products, you’re paying more money per item because your order is relatively small.

5. Profits

In general, franchises see higher profits than independently established businesses. Most franchises have recognizable brands that bring customers in droves. This popularity results in higher profits. Even franchises that require a high initial investment for the franchise fee see high return on investment.
6. Lower risk

Starting a business is risky. This is true whether a business owner is opening an independent business or purchasing a franchise. That being said, the risk is lower when opening a franchise.

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7. Built-in customer base

One of the biggest struggles of any new business is finding customers. Franchises, on the other hand, come with instant brand recognition and a loyal customer base. Even if you’re opening the first branch of a franchise in a small town, the likelihood is that potential customers are already familiar with the brand from exposure to TV commercials or travel to other cities.
8. Be your own boss

One of the biggest benefits of owning a business is being your own boss. When starting a franchise business, you get to be your own boss with the added benefit of receiving support from the franchise’s knowledge base.

Owning a business is hard work, but when you’re your own boss, you get to create your own schedule, have autonomy over your career, and potentially work from home.

A franchise gives you the benefit of being your own boss without the risk of starting your own independent business.

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1. It creates an opportunity for passive income

If you own intellectual property, licensing can create a passive income stream for you. You don’t even have to do anything to generate revenue. Once you develop the IP, you just need to sell licenses. If the licensees are making money, then you will too, so you don’t have to worry about losing your ownership rights. These payments could last for several years without interruption.
2. It creates new business opportunities

Such an arrangement can be beneficial to licensees since it requires less money from them to start a business. Instead of outright ownership, they can purchase a business license and start making money immediately. Licenses cost less than outright ownership. Licensees who can improve upon a product can make even more money from their venture. The new business benefits from the reputation and consumer awareness of the trademark name or brand name, even if it is a trademark or brand name.

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3. It reduces risks for both parties

A business license is designed to reduce the risks involved in doing business for everyone. A licensee faces fewer risks in product development, market testing, manufacturing, and distribution. Selling and servicing what is offered entails fewer risks from the perspective of the licensor. It is a win-win situation for everyone involved since neither party has to invest their own money to earn profits.
4. It creates an easier entry into foreign markets

A licensing agreement allows the licensor to get their product into new markets much more easily than if they were doing the work on their own. It is much easier to enter foreign markets this way, as the license allows the intellectual property to cross borders. Because a domestic company uses the IP, just as the licensor might use it domestically, tariff barriers can be avoided.

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5. It creates self-employment opportunities

Getting a business license allows people to start their own businesses. While they enjoy the advantages of self-employment, such as setting their own hours, you enjoy the benefits of having someone invested in your IP. Licensees have the possibility of gaining a monopoly over a product or service in a specific territory at a lower investment rate than going it alone. Personal IP also carries advantages from the licensor’s perspective.

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Advantages of franchising for the franchisor

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Advantages of franchising for the franchisor

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1. Access to capital

One of the biggest barriers to expansion for small business is the money it costs to expand. And while there are several business loan options, they don’t always pan out. Franchising your business will take some time and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees.
2. Efficient growth

Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost as difficult. When that burden is shared with another business owner, it makes the process more efficient and takes the onus off the initial business owner.

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3. Minimal employee supervision

One of the big stresses as a business owner is hiring and managing employees. As a franchisor, the only support that you have to provide to the franchisee is training and business knowledge. In general, the franchisor has no hand in the management, hiring, and firing of employees.
4. Increased brand awareness

One of the many benefits of franchising is increased brand awareness. The more locations the brand has, the more people who are aware of the brand. And the more these customers come to know and love the brand, the more profitable and successful the brand can be. This increased brand awareness of a multi-location franchise can be highly beneficial to the franchisor and their franchisees—a win-win.

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5. Reduced risk

One of the biggest benefits to the franchisor in a franchise agreement is the ability to expand without an increase in risk. Because the franchisee takes on the debt and liability of opening a unit under the name of the franchise, the franchisor gets all the benefit of an additional location without taking on the risk themselves.

Additionally, the franchisor is often further insulated because the franchise is incorporated as a new business entity, leaving the original business owned by the franchisor as a separate entity from the franchise. A franchise lawyer can help to set up the terms for this type of protection within the franchise agreement

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Disadvantages of franchising for the franchisee

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Disadvantages of franchising for the franchisee

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1. Restricting regulations

While a franchise allows the franchisee to be their own boss, they’re not entirely in control of their business, nor can they make decisions without taking into account the opinion of the franchisor.

For most franchisees, the most frustrating disadvantage that they face is that they must follow the restrictions laid out in the franchise agreement. The franchisor can exert a degree of control over the majority of the franchise business and decisions made by the franchisee.
2. Initial cost

While the initial investment of the franchise fee buys a lot of benefits for the franchisee, it can also be costly—especially if you’re joining a very well-known and profitable franchise. While this often translates to larger profits, coming up with this initial money can put a strain on any small business owner.

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3. Ongoing investment

In addition to the initial investment you’ll have to provide to start your franchise, there are additional, ongoing costs that are unique to franchises. Within the franchise agreement, the ongoing costs of the franchise should be enumerated. These costs might include royalty fees, advertising costs, and a charge for training services.
4. Lack of financial privacy

Another disadvantage of franchising is a lack of privacy. The franchise agreement will likely stipulate that the franchisor can oversee the entire financial ecosystem of the franchise. This lack of financial privacy can be seen by franchisee as a disadvantage of owning a franchise; however, it may be less of an issue if you welcome financial guidance.

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5. Potential for conflict

While one of the benefits of owning a franchise is the network of support you receive, it also has the potential for conflict. Any close business relationship, especially when there’s an imbalance of power, comes with a risk that the parties won’t get along.

While a franchise agreement states the expectations of both the franchisee and franchisor, the franchisee has minimal power to enforce the franchise agreement without a costly legal battle. Whether it’s lack of support or simply a clash of personalities, the closeness of the business relationship between franchisor and franchisee is rife for conflict. A franchisor should screen all potential franchisees before entering into business with them, and as the franchisor, you should also use this opportunity to get a feel for the franchisor’s personality and management style.

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1. It increases opportunities for IP theft

Licensing your intellectual property and products exposes you to higher levels of exposure. As you don’t control how the licensee conducts its business, there will be more opportunities for theft, piracy, and misuse. You can police the use of your IP to some extent, but you cannot see everything that is being done. It only takes one slip-up for your items to be distributed illegally, which means you don’t see the profits on your items.

2. It creates a dependency upon the licensor

Licensing agreements involve the licensee taking on all the risks involved in the arrangement. To make their own profit, they are dependent on the quality of the IP. If they are successful and earn a lot of money, they may be asked for a renewal that is more expensive than the original license. In addition, there is no guarantee of exclusivity with many licenses, meaning multiple businesses could compete in the same marketplace, using the same tools and products, to generate revenues.

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3. It creates added competition in the marketplace

Many licensors find that their licensees eventually become competitors in their own markets. This creates a difficult situation since one company or the other stands to lose if IP is sold in exactly the same way. To protect against a needlessly competitive market, many licenses include geographic restrictions. The growth of internet access around the world, however, makes it easy to become competitive without intending to.

4. It is offered for a limited time

Most licenses are only available for a limited period of time. Although that time period maybe five to ten years, the licensee must consider an expiration date. Is it worthwhile to invest time, effort, and money in marketing goods and services that may not be available to them at the end of the licensing period? Is there a guaranteed renewal rate for the license, especially if it expires within five years? Royalties and revenues must be balanced in a way that makes sense for everyone involved.

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5. It could damage the reputation of both parties

Licensing is one of the elements of a relationship that can be mismanaged, resulting in a loss of brand reputation. If multiple licenses are offered, the reputation may suffer globally, affecting several businesses not involved in the situation. Good quality management practices are the only way to resolve this potential management issue. This is why many license agreements include a series of best practices to follow, creating consistency within the brand across all license agreements.

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Disadvantages of franchising for the franchisor

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Disadvantages of franchising for the franchisor

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1. Loss of complete brand control

When a franchisor allows a franchisee to open a business under their brand, they’re giving away (actually, selling) some of the control over their small business branding. While the franchise agreement should contain strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won’t be clones of you. They will think and act differently, and your brand could wind up suffering because of it.
2. Increased potential for legal disputes

Any time you enter into a close business agreement with other people, you open yourself to the risk of legal disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the possibilities for legal disputes between the franchisor and franchisees, these disputes are still possible.

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3. Initial investment

When a franchisor starts a franchise, there’s a startup cost to get the business in operation. A franchisor must make sure that the franchise agreement is written clearly and reviewed by a lawyer experienced in franchise law. You may also hire a franchise consultant for expertise during this process. Starting a franchise requires an initial investment of both time and money on the part of the franchisor.
4. Federal and state regulation

While not entirely a drawback, dealing with the federal regulations set down by the Federal Trade Commission for franchises can be a nuisance for franchisors. These regulations ensure that franchises are operated fairly, but it also requires time and effort from the franchisors to meet all of these regulations.

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McDonald's: McDonald's is a franchise restaurant giant. It allows individual franchisees to operate restaurants based on the McDonald's brand and offer McDonald's products and services.

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7-Eleven: 7-Eleven is an international franchise convenience store brand. Franchisees operate 7-Eleven stores and sell a variety of merchandise, including food, beverages and other convenience items.

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Marriott International: Marriott is an international hotel franchise brand that allows individual franchisees to operate Marriott-branded hotels and provide accommodation and resort services.

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Nike: Nike authorizes other manufacturers to make and sell athletic shoes, apparel and accessories using its brand and patented technology.

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Coca-Cola: Coca-Cola authorizes other companies to produce and sell beverages, apparel and peripheral products under its brand name.

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Disney: Disney licenses other companies to use its well-known characters (such as Mickey Mouse and Cinderella) to create related products in toys, clothing, movies and other media.

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Subway: Subway is a franchised fast-food brand that allows franchisees to make and sell sandwiches in a variety of flavors.

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Starbucks: Starbucks allows independent franchisees to operate Starbucks coffee stores, offering coffee, tea and snacks.

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Star Wars: Lucasfilm licenses other studios to produce and distribute Star Wars films and related media.

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FIFA: The Federation Internationale de Football Association (FIFA) authorizes Electronic Arts (EA Sports) to create video games using its World Cup soccer tournament brand, such as the FIFA series.