Differences Between Licensing & Franchising Agreements. Licensing and franchising can help you grow your business rapidly and cost- effectively. Allyson Ricketts from Fotolia. Every owner of a successful small business is, at one point or another, confronted with the decision to invest more capital and grow, or fall back on their success and stay small. The inherent risk and investment required to grow a small business often prompts many owners to opt for the latter.
Explain the difference between franchising, licensing, and foreign direct investment, in terms of ownership, control, and risk. 1. Explain the difference between franchising, licensing, and foreign direct investment, in terms of ownership, control, and risk. Differences Between Licensing & Franchising Agreements. Licensing and franchising can help you grow your business. limits direct competition between. What's the difference between Franchising and Licensing? franchising allows them to expand their business for less investment than. Franchising vs Licensing. Outsourcing Versus Foreign Direct Investment. technology licensing, franchising. The empirical and theoretical differences between FDI and outsourcing leads. Licensing versus direct investment: implications for economic growth. mode between licensing and. Saggi, K., 1999. Foreign direct investment, licensing.
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Licensing and franchising however, are two ways through which owners can rapidly grow their businesses while delegating much of the costs and risks to a third party. Licensing. Much like the state government granting individuals a license to give them permission to drive, businesses sometimes grant other organizations licenses to give them permission to use their intellectual property. A license is a contract through which one party grants another permission to use its patents, trademarks, copyrights, designs or trade secrets. The organization receiving the license, or licensee, compensates the licensor by paying a flat fee, royalties or a combination of the two. The agreement does not transfer ownership of the intellectual property. By licensing to third parties, small business owners can expand their businesses' reach and grow sales without having to invest in new locations or distribution networks, and risking failure. Franchising. Franchising grows a business in a similar way but the franchising party or franchisor gives the franchisee permission to not only use its intellectual property but also its operating system.
In addition to their trademarks, franchisees often use frachisors' distribution systems and marketing campaigns to sell the franchisors' products or services. In return, the franchisee usually pays the franchisor an upfront fee, royalties, and sometimes even a monthly or annual fee.
Like licensing, franchising can help a small business grow rapidly and, although it requires more set- up and investment than a pure licensing deal, franchising remains considerably more affordable than opening new locations. Related Reading: The Differences Between Public Relations Marketing & Branding. Set- up. A licensing agreement can be drafted and completed in as little as a week.
Before offering a franchise however, a business must standardize its internal systems, operations, marketing and distribution. A business must also complete extensive legal documentation and draft franchising agreements before becoming a franchisor. Franchisees are also subjected to a lengthy and thorough selection process. Franchising usually takes longer and costs more to set up than licensing. Control & amp; Support. In a licensing agreement though, the licensor usually does not retain much control over how the licensee may operate. Unless otherwise specified, licensees can use the licensed property in whichever way they choose.
Over the life of the agreement, which also tends to not last as long as a franchising relationship, licensees operate virtually independent from their licensors. Licensors in turn provide little if any support to licensees. Franchisors on the other hand, maintain significant control over how a franchisee operates. How its intellectual property is used and how its products or services are delivered is often dictated by the franchisor. At times, franchisors even set requirements on price. In exchange, franchisors also offer more support to franchisees in the way of training, site selection and marketing.
Exclusivity and Competition. Licensors can sometimes license their intellectual property to two or more organizations operating in the same geographic region or market forcing licensees to compete directly with one another. Franchisees however, are normally granted an exclusive territory in which to operate. In urban areas, this territory can be as small as a city block but it, when coupled with the site- selection assistance provided by the franchisor, limits direct competition between franchisees. About the Author.
Oscar Guzman is the brand and marketing manager for a fashion accessories company. Specializing in branding, strategy and marketing, he has contributed to the "Miami Herald," "San Francisco Chronicle" and "South Florida Business Journal," among other publications. Guzman holds a Master of Business Administration from the University of Miami. Photo Creditsgrow together image by Allyson Ricketts from Fotolia.