Franchise vs. Licensing Agreements: Key Differences for Gurgaon Investors

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To expand any business, the business owners offer their ideas to other individuals who, as per their understanding, plans, resources, finances, etc., decide which business model suits them. Franchising and licensing are two popular models of business. Franchise agreements and licensing agreements are very effective strategies for businesses to grow their market presence and profits without the investment required for establishing new outlets. These two often seem synonymous with one another, but they are fundamentally different.

Following is some brief information about the franchise agreements:
• A franchise agreement is a legal contract in which the franchisor (individual or company that grants a franchise for sale of products or operation of a service) gives the franchisee (individual or company that holds a franchise for sale of products or operation of a service) authorization to operate a business under the franchisor’s name, and utilizing the franchisor’s brand, trademark, and business strategies in exchange for a consideration. This arrangement commonly includes substantial support and assistance from the franchisor.
• Example: McDonald’s is a world-famous brand with more than 38,000 franchises in over 100 countries globally. The franchisees of McDonald, although operate their outlets independently, still have to be accountable to the franchisors and adhere to the guidelines prescribed by the franchisor and mentioned in the franchise agreement. This ensures that there is uniformity and consistency across all franchises at every location in terms of quality in food, service, product, branding, etc.

Following is some brief information about the licensing agreements:
• A licensing agreement is a legally binding contract between a licensor (who owns the intellectual property and its rights) and a licensee (who holds those rights) that provides the licensee with the authorization to use the licensor’s intellectual property (IP) for a specified purpose under certain terms and conditions in exchange for certain considerations. This agreement mentions in itself the terms of use, restrictions, duration, fees, royalty, and some other conditions related to the licensing of the IP.
• Example: Disney grants licenses to multiple manufacturers to develop a range of products like toys, clothing, and other merchandise showcasing Disney characters. These manufacturers work independently but are required to follow guidelines regarding the depiction of their characters.
From a surface level, there seems to be no or very little difference between the two types of agreements. But the main difference lies in the way these agreements work. There are differences in various aspects like control systems, support systems, costs, legal compliance, etc.

Some of the legal and operational differences between them are discussed in detail below:
• Under franchise, the franchisors have major control over their franchisees to ensure that every franchise operates in a uniform manner. The management, procedures of work, schedule of work, pricing, outlet design, etc. are governed by the franchisor, and he ensures that all the franchises provide the same environment no matter where they are located. On the other hand, under license, the licensor doesn’t have as much control over the business as a franchisor. The licensee has more operational freedom and can create its own business model or procedure, unless and until it remains within the bounds of the licensing agreement.
• Under franchise, the franchisee is offered extensive support from the franchisor in the form of initial and ongoing training and assistance in marketing the business and its operations. But in the case of license, limited support is provided as the licensee makes its decisions on its own. Mainly, support in terms of brand usage and IP is provided, which is the key asset of the franchise. And apart from this, the licensor and licensee can themselves also mutually decide in which areas support will be required and provided.
• Under franchise, the prime goal of the franchisor is to ensure that there remains consistency across all its locations, wherever a franchise under its brand is opened. This means every such franchise shall provide a consistent customer experience in terms of services, quality of food, design of outlet, menu, pricing, etc. But under license, there’s no strict rule of consistency. The licensor only ensures that the licensee’s products and services align with the established standards, and the rest of the practices, like the operations it performs in the business, the customer service standards, and other day-to-day operations, are left at the discretion of the licensee.
• Aside from the governance of the franchisor, the franchises have to comply with specific regulations prescribed in the jurisdictions in which they operate. This means that for every different region, the franchises have to comply with the regulations and laws of that area and any special franchise law that exists. Apart from this, it also mandates the provision of disclosure documents. But under license, there is some form of relaxation from all these compliances, and thus there remains a degree of flexibility. The licensee has to comply with the general provisions of the contract and the intellectual property laws which they utilize in their business. Overall, license agreements are comparatively less regulated as compared to franchise agreements.

There exist very minute but important differences in both of these systems, and thus, it is crucial to evaluate and analyse beforehand that the individual or company needs to choose which path, as both of them have certain pros and cons.

The below discussion will provide some clarity on which type is appropriate for whom:
• Franchising is a preferred option for those businesses that want to expand rapidly while avoiding the financial commitments and uncertainties of launching company-owned locations. Then, businesses which want to maintain consistency and uniformity throughout their outlets also prefer this type. It helps them to build and maintain brand loyalty wherever they exist. Also, the franchisors provide extensive support to the franchisees at various stages of their operations, which provides a boost to the business and helps them get timely updates. At last, businesses with a well-established and scalable business model are well-suited for franchising, as it gives the franchisees the confidence to implement a tried-and-tested system.
• Licensing is suitable for those businesses which want to earn profits mainly from their intellectual properties without indulging in the day-to-day activities of the licensee’s operations. Businesses that want to enter a new category of product or market can choose this type. There are also lower legal and administrative costs as compared to those required by the franchising system. And businesses which require flexibility in their operations and fewer legal hurdles in their work can opt for this.

The final decision in the end remains after having a conversation where both parties come together and discuss their needs and expectations, and on the basis of that, the appropriate system can be chosen. Each model has its advantages and disadvantages, which have consequential implications; thus, businesses should choose the option that aligns with their objectives, resources, and required level of autonomy or control.
Authored by: Adv. Anant Sharma & Sahil Arora

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