Diversification and expansion are a natural progression for any business entity seeking to minimize its risks and enhance its competitive abilities. For instance, the brand, Disney is one of the biggest businesses based off on licensing. Disney’s consumer products, licenses its commercial rights for movies, characters, and designs, to other companies. Often at Nicomedia IP we get clients who seek to in-road a new market and find it difficult to decide if they should opt for licensing or franchising. These 2 means of legal routes are in fact an effective means to establish your business in new territory without too much of expenditure or risk of infringement of IP rights. But how do you decide? Take a look at few key differences that can help you make up your mind. Here you go.
“These 2 means of legal routes are in fact an effective means of establish your business in new territory without too much of expenditure or risk of infringement of IP rights.”
The Difference:
Firstly, both licensing and franchising are type of business agreement that agree upon the use of a brand’s design or business elements, its usage of technologies in operation of the entity and distinctive features of the company’s market image. The major difference between the two lies in legal scope of operation.
While a licensor i.e. as owner of your business rights you can extend a feature of exclusivity around the use of your trademarks and brand elements to the licensee. However, the licensee can choose to retain ownership over the management and operations of their business their way.
Whereas, in a franchise agreement, the franchise i.e. the owner has greater scope of control to determine how a franchisee executes commercial rights and standards . For example, A drug company licenses its formulation to a manufacturer at a price for manufacturing a drug using their patented formula. While your local McDonald’s restaurant is probably a franchisee outlet that applied for a franchising agreement to the McDonald’s Corporation agreeing to supply food set according to standards of the corporation to enable quality control and use their designs as the corporation suggests.
The Top 3 difference:
Summary of the differences between licensing and franchising:
- Levels of Control – License agreements apply only to the use of owner’s trademark or technology but not how the licensee operates its business using them. While, franchise agreements controls how a franchisee operates their business using your name.
- Regulatory Differences – Both the agreements are governed under general contract law. However, the licenses are expressly covered under Indians frameworks of intellectual property law, such as the Patents Act 1974, the Copyright Act 1957 and Section 48 of the Trademark Act.
- Business Goals – License agreements are primarily incorporated to monetize brand design rights and its trademarks for diversification meanwhile; franchise agreements enable business in expansion of their market footprints and create uniform standards; under one parasol.
“every franchise agreement can and will include a license such a technology, software, design rights. But license agreement may or may not create opportunities to establish a franchise.”
Which one is right for you?
Considering the close similarities, it is essential to determine which agreement is best for diversification and which is better for business expansion. At Nicomedia IP we suggest to our clients to keep the following in mind before taking that leap. That is, every franchise agreement can and will include a license such as technology, software, design rights. But license agreement may or may not create opportunities to establish a franchise.
Besides, there are minor downsides to both the legal models. In case of franchising the franchise can enable its franchisee to take advantages of their pre-existing relationships with vendors and suppliers, that can pose a risk to your trade secrets leading to conflict or encroachment of certain commercial rights. On the other hand, licensing poses a risk to quality control for brands in case proper IP strategies are not followed.
Therefore, before opting for one or the other legal route you should ask yourself the following questions:
- Are you ready to meet compliances and incur legal costs for meeting legal obligations of buying a franchise ?
- What is the level of control you seek in managing your business?
- Are you willing to invest in dispute resolution?
- How will the license agreement make money for both the entities?
- What is adequate gain in value for each party to consider a worthwhile relationship?
Every business has its potential opportunities and challenges therefore, it is important to consider the legal resources available before making your decision. Overall, both the routes allow brand owners lot of room to diversify and expand their portfolio as well as reach variety of audience and distribution networks to better their value; without overstepping.
If you are unsure of how to classify your business relationship, get in touch with the Nicomedia IP team. We are here to help you grow your business effectively while maintaining compliances.