Franchising v. Licensing: An Entrepreneur’s Dilemma
For those wishing to start a business and work for themselves, there are a number of perplexing decisions that have to be made right up front. One of the most important decisions that you will have to face is whether to license a product, service or idea from someone else, or enter into a franchise agreement. Of course, you can always create your own ideas, in which case you will want to secure them as intellectual property with patents, trademarks and copyrights. But today, we want to focus on the question of how to leverage someone else’s idea to make money.
Franchising is the way of the future
Many businesses work on a franchise model. This means that for an up-front fee and royalties, you have the opportunity to use the brand, supplier network, training, and resources of a larger company. The advantages to this approach are obvious, in that they allow you to get hands on training and specialized knowledge from someone who has already “done the hard work” of figuring out how to make a successful business run. You can learn from their mistakes, train with them, and even observe how their work is done in other stores.
Additionally, franchises typically require a certain amount of advertising from each of their franchisees. This means that by joining a growing network of other franchisees, you benefit from the marketing money that all of the franchisees are putting into the brand in a nation or region.
Of course, all of this assumes that the brand itself and the name have become well known and have a positive reputation. By spending money and constantly giving a percentage of your sales right off the top to this entity, you are giving up a fairly big bargaining chip as an entrepreneur right at the start. This means that you want to be sure that the franchise that you are tapping into has a great reputation and a name that is growing in the region of the country you’re in.
It also means that you are tied to this company. If they end up in a lawsuit because their products are allegedly infringing on others, you may be a part of that lawsuit too. If they have monetary problems, then the dissolution of the entire franchising network will certainly affect you. You want to make sure that there is a great deal of financial health in the “mothership” that you are tapping into.
Licensing products: a halfway approach
Instead of franchising, you also have the opportunity, in many cases, to license the product from someone else. This means paying them royalty on everything that you sell. This is similar to the franchising model but often doesn’t necessarily require that you enter into the same long-term binding agreements. You give them a royalty every time that you make a sale and that is it. You don’t get hands-on training, but you also aren’t typically required to do the kinds of marketing and other training sessions that can be required as part of franchise agreements. You aren’t affected if the franchise network breaks up because you can keep licensing the product or intellectual property from whomever owns it. You usually don’t get to sell it under the same brand because you are using their product in your business.
The advantages to licensing are less control from the outside. One of the biggest disadvantages is that they can typically stop licensing after a period of time, leaving you out in the cold. Of course, your requirements with the company are less onerous and you have more opportunities to branch out from there, should you desire.
Conclusion
Working with a business savvy attorney team is extremely important. These are just two of many approaches you have in building a business from the ground up. As an entrepreneur you may also want to consider what the same investment would do if you were to create your own product or service. Navigating the waters of licensing and franchising are extremely important and require careful analysis up front about how to best set up your business for success. If you have questions about licensing or franchising call one of our attorneys at Cornerstone Law Firm to set up a consultation today.
