One alternative expansion method that deserves special attention is licensing. Many companies feel they have found a way to avoid the complications of franchising by labelling their program as ‘licensing.’ This often-misguided belief usually flows from bad advice from attorneys or ill informed consultants. At best, the effort to expand to multiple operations by service mark or trademark ‘licensing’ is a dangerous venture if you intend to maintain any control over the operations of the licensee.
Licensing vs. franchising
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, wide-spread 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 full set of franchise rules. If a product is being manufactured and sold, this is usually fine. You can perform periodic quality tests to be certain your strict requirements are being met. (Unless, of course, you issue more than one license. Then you must worry about violating this exception as well).
In any event, what about service to the customer? How about the cleanliness of the business premises? Are they meeting local health regulations? Are OHSE requirements being met? Are they following up to ensure customer satisfaction? Hopefully, when you attempt to build goodwill, it turns out to be goodwill. Unless you have proper controls and demand compliance to your operating standards, you aren’t building anything for certain, and you may be building harm.
If you do have the proper controls, then you are franchising, no matter what you choose to call it.
Primary Difference between licensing & 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 likely to be limited to ‘passive’ control, such as inspection of produced goods and testing to insure that quality standards are being met. On the other hand, package (or ‘business format’) franchising involves active control over the franchisee’s ‘method of operation’ This typically includes the location of the business, the hours of operation, the management of the business and other key business decisions.
There is only one sure way to build goodwill and value to your business through a license. It is called franchising.
Even if you successfully arrange a licensing system that exempts you from national laws, what about Franchise Code of Conduct laws? The definition of a franchise under most state laws is broad and encompassing. We will be happy to discuss the benefits and dangers of franchising ‘alternatives.’