The Difference between Franchising and Licensing
The Difference between Licensing and Franchising
The primary difference between simple trademark licensing and package franchising is in the type and degree of control exercised by the franchisor and licensor. The trademark licensor is interested in the quality of the final goods produced by the licensee, not in the licensee’s method of operation. The kind of control he exercises is thus likely to be limited to “passive” control such as inspection of produced goods and testing to insure that quality standards are being met.
Package (or “business format”) franchising, on the other hand, involves active control over the franchisee’s “method of operation”: The location of the business, the hours of operation, the management of the business, and other business matters.
Franchising systems are designed to enhance the goodwill (value) of the franchised product or service. A trademark licensed to numerous franchisees is hopefully enhanced by multiplied sales of the products or services, widespread common advertising and the other beneficial characteristics that result in increased name recognition. In order to insure that the increased name recognition is accomplished in a positive manner, it is necessary to establish controls over the operations of the licensee and the quality of the service or product. In doing so, there are basically two choices:
1. Control only the quality of the product or service; or
2. Control that quality and also establish controls on the operation of the licensee’s business.
If only the quality of the product or service is controlled, the arrangement is a license, and not subject to the franchise rules. If a product is being manufactured and sold, this is usually fine.
Norman P. Friend
President
Franchise 101 Incorporated.
