At The Jayson Law Group LLC our Newark business attorneys focus on various types of business contracts and formations. Today we would like to discuss the difference between licensing a business and franchising a business.

Every successful business owner is faced with the decision to invest more capital and grow or stay small. There are inherent risks in growing, but licensing and franchising are two ways through which owners can grow their business while delegating much of the risks and costs to a third party, the licensee or franchisee. 

Licensing

Businesses can grant licenses to other organizations to use their intellectual property. A license gives one party the permission to use the second party’s patents, trademarks, copyrights, designs, or trade secrets without transferring ownership. By licensing to another organization a small business can expand the sales and reach without having to invest in new locations, distribution networks, and risking failure. Licensing agreements can be exclusive or non-exclusive.

What do we mean by this?  The best way to think of this is by using the example of a sports team.  Sports teams own the intellectual property to the team name and logo.  The fan base would like to own clothing with the team’s name and logo. Since the team is not in the business of making clothing they enter into a licensing agreement with a clothing company to manufacture clothes with the team’s logo and name on them.

Franchising

Unlike licensing where a business gives a third party permission to use specific intellectual property in a way uncommon to the business, franchising gives a third-party the ability to use the intellectual property of the business in the same way the business uses that intellectual property.

What do we mean by this?  A restaurant, although you can franchise most businesses, wants to be in all 50 states, but the chain does not want to own each restaurant. The original restaurant (“franchisor”) offers a third-party (“franchisee”) the ability to open an exact copy of the original restaurant in certain territories. The franchisor gives the franchisee permission to use its intellectual property and operating system. An operating system includes distribution systems and marketing campaigns to see the franchisor’s products or services. The franchisee pays the franchisor an upfront fee, royalties, and sometime even a monthly or annual fee. Although it requires more set-up and investment than licensing, franchising still remains more affordable than opening new locations on your own.

This concludes The Jayson Law Group LLC’s examination of the difference between licensing and franchising in business. Stay tuned for more articles discussing issues that business face.