Difference Between Franchising & Licensing in Retail

In retail, when a person wants to sell a licensed product, he contacts the license holder and works out a business arrangement. However, when someone wants to sell franchised products, it becomes more difficult. Franchisers hold more power over their product than licensers, and franchisees engaged in poor business practices can legally lose their franchise.

Franchises

A franchise is a business partnership between a franchiser and a franchisee. The franchiser is the party creating the product or service in which the franchisee wants to invest. A franchise usually consists of a business practice or service with a proven successful track record. Investors looking to replicate that success buy into a program allowing them to set up their own franchises of the business, based upon the original model and the materials and equipment needed. In retail, a franchise actually has its own identity within the identity of the retail space. For example, although Walmart has its own corporate identity, it also allows franchise space within its doors for businesses such as Subway and McDonald's.

Licenses

Licensing is less expensive than getting involved with franchises. In many cases, the licenser agrees to sell products to the licensee, setting up a business relationship much more lenient than that of a franchise. Some businesses attempt to get around Federal Trade Commission rules regarding franchises by defining their franchising agreement as nothing more than a license, but doing so runs the risk of fines and penalties. In retail, a licensing arrangement might be as simple as selling a specific product in a retail store location. Licensing is also known under the phrase "business opportunities license."

Federal Trade Commission

Retailers looking to avoid expensive franchising fees might attempt to engage in licensing opportunities. The difficulty comes in to finding the right level of support to include in the licensing. Too much support might allow the Federal Trade Commission (FTC) to determine the business is actually a franchise, resulting in fines and having to engage in a new series of filings with the FTC. When Apple allows Target to sell licensed products in its stores, the retailer is on solid legal ground and in no danger of being seen as a franchisee. However, if Target were to open an Apple store within its Target stores and claimed it was only licensing the products, the FTC would most likely find Target in violation of the franchising laws.

Differences

The primary difference between a retailer selling licensed products (such as National Football League jerseys) and a retailer engaged in franchised business depends upon the level of assistance provided by the business partner, as well as the trademarks used. When a retailer buys into a franchise, the retailer also buys into the brand identity and in many cases, the retailer can be forced out of a franchise if the franchiser decides the trademark and brand identity are being damaged.

References

• World Intellectual Property Organization; Franchising and Licensing...Them?; Ian Cockburn
• Gaebler.com: Franchisees versus Licensees
• Federal Trade Commission: Franchise and Business Opportunity FAQs
• Franchise411: Defining a Franchise: The Duck Story
• Entrepreneur; "Growing Without Franchising;" Mark Siebert; March 2008