Opening a new business under a successful brand is a sure-fire way to success. Given that you’ve done your homework and the projections are looking good, you could be running a profitable operation in no time. However, the choice between buying into a franchise and purchasing a licence to operate under the brand, in exchange for a fee and portion of your profits can go one of two ways.
“It is essential to understand the difference between a franchising agreement and a licensing agreement, especially when seeking funding from a financial services provider,” says Morné Cronjé, head of franchising at FNB Business.
“Each business model is governed by a completely different agreement or contract and they operate in a unique way.”
When contemplating which option is right for you, consider how much independence you’d like to hold as a business owner, what kind of investment and share of the profits you’re willing to make and the type of relationship you’d like with your mother brand.
1Support vs autonomy
When toy industry behemoth Toys “R” Us filed for bankruptcy in September 2017, Toys “R” Us South Africa distanced itself from its US affiliates saying that the SA business is performing so well, it’s embarking on an expansion drive. How can the mothership be suffering while its SA counterpart is thriving?
Toys “R” Us SA is a privately-owned independent company operating under a license agreement with Toys “R” Us Inc. While the local version of the toy giant has purchased the right to use licensed material and intellectual property, the licensor has no control over the operations of the licensee.
With franchising, however, the franchisor exerts more control over the franchisee, but where the franchise lacks in autonomy, it makes up for in support. “While entering into a franchise requires more of an initial investment, the benefits of an entire organisation supporting you are powerful,” say the owners of US-based fitness studio Barre Forte.
While both franchisees and licensees pay an upfront fee and ongoing royalty payments to the owner of the brand or intellectual property – the franchisor or licensor – as a licensee, you bear the developmental cost and the risk associated with launching foreign operations.
Cronjé explains a franchising agreement as a duplication of a specific business model, governed or controlled through a franchise agreement where the franchisor holds all rights, including the business model.
“While franchise and license agreements vary significantly, looking at the cost distinctions between the two, it is generally more affordable to pursue a license agreement than a franchise agreement,” he says.
The initial investment may be higher for a franchise operation, but access to a proven concept, an established customer base and ongoing product and service innovation could end up wing worth the cost. Not to mention the support franchisees get in the form of ongoing training and assistance with the initial setup process.
“When it comes to training, the licensing model would only train staff on the product they are selling,” explains Cronjé. “This is very different to franchising, where comprehensive training is provided on how to operate the entire business.”
Licensing generally includes some components of franchising, however what the difference is that specific operational support systems aren’t dictated by the group, which could bode well for you if you’re looking for the benefits of a big brand without the red tape.