What Is the Difference Between Licensing and Franchising?
Licensing lets someone else use your brand, product, or intellectual property for a fee — with defined rules for how it’s used. Franchising goes further: you provide a complete business playbook, including operations, training, and standards, so another owner can replicate your entire business model in a new location.
Is licensing and franchising the right growth move?
Most of the time, when I talk about being self-funded as a founder, I’m talking about growing your business by selling things or borrowing money.
But there are a couple of other ways to self-fund without giving up ownership control.
Enter stage left: licensing and franchising.
Put simply, instead of scaling your business yourself, you can let other people copy some or all of what you’ve done for a fee. If you have a business or brand that could be replicated, you can train somebody else to do or sell the thing you do someplace else with licensing and franchising.
It’s other people’s money coming into your company in big chunks because they want to buy the rights to copy something you already built.
Sounds great, right?
Well, this where I say the thing that makes some people want to immediately close the tab on this idea:
Walking this path will change your job.
But for the right person, that’s the whole appeal.
You can grow rapidly without giving up equity, and you get to build an operating machine other people can run. But make sure you understand the founder / CEO’s role, because it’s different than being the hands-on operator.
But first, let’s dig into the specifics of what licensing and franchising are, how that will impact your role as a founder, and how to assess whether or not this is a growth move you should consider.
Licensing and franchising exist on a spectrum
We start with licensing, because it’s simpler than you might think. You can license your name, image, and likeness. Or maybe you designed a striking visual brand identity and you’ll let someone else use the name, logo, colors, and brand standards.
Licensing can also mean you own or control the legal rights to a specific product and you let someone else sell it. Under a licensing deal, you can bundle the brand or product with instructions and standards for how you want them used.
The fee structures can be relatively simple — a payment for a period of use.
Franchising, on the other hand, is much more robust. You’re going to develop a playbook and help others follow it, exactly, to replicate your business.
That can include things like store layout, buildout plan, location requirements, staff training, operating plans, systems, and so on. A business in a box, if you will.
This type of rigid structure is how I can get the same Heyday facial or Drybar blowout in Boston, Houston, or Seattle, even though each location is independently operated.
As your franchising package becomes more sophisticated, your fees can go up, and may come as upfront and annual fees for a location or geographic area, royalties, product sales, and revenue share.
You can no longer be the “doer of all the things”
Now that you’re excited about the money, here’s the kicker:
This growth model asks you to shift from “chief doing officer” to owner and keeper of the IP.
Licenses and franchises are based on legal rights and agreements. If you set a standard, you have to monitor and maintain it rigorously — e.g., you need to make sure people are following your brand guide, providing a consistent customer experience, and meeting your operating requirements. You become the reinforcer and the quality control.
You also become the teacher. In a franchise model, you’re training people on how to sell your products, represent the brand, run the business.
For some business owners I’ve worked with, this is genuinely exciting: they want to be in the “teacher” seat. Instead of taking on the risk and expense of building everything, they want to develop a system for getting paid for the concept while sharing the wealth with other business owners.
Yes, that does mean your day-to-day changes.
But perhaps that’s the trade you want: you’re building a bigger footprint while stepping into a role that’s more about standards, training, and leadership than being the one doing all the building.
So, if your vision is, “I want to be out front. I want to tell the story, get everybody together, cut ribbons, be the face of a bigger brand,” this is a great way to do that.
This is also why your consistency matters
Just as you’re going to expect a consistent experience from your licensees or franchisees, and they’re going to expect the same from you: consistent standards, branding, procedures, and rules.
So if you’re constantly tinkering or prone to making exceptions, a licensing or franchise path could be a problem.
The minute you start creating exceptions, you set a precedent. You can’t have 18 different deals. And you can’t say: “This location doesn’t have to follow that rule, but this location does.” Not only is that confusing for your customers, but it’s a good way to find yourself on the wrong end of a lawsuit.
This is why I say, with love: if you do not like rules and lawyers, this path may not be for you. This is not a place you DIY. You’re going to need an excellent attorney.
I’m not saying you’ll never tinker again. You might decide on a hybrid — some licensed or franchised locations, some owned. Maybe even a “test” store where you can try out new things. But this is essentially the tradeoff of these growth strategies: you can build your company bigger and faster, and you’re signing up to lead a more structured company with standards, training, and enforcement.
So, is this the right growth move for you?
Start here:
Do you have a business model that can be replicated in units, and can you train other people to do it?
Do you know what you’re actually licensing: name/brand, product, process, or the full playbook?
Can you deliver a consistent experience with consistent rules?
Are you okay with signing up for the job of standards, training, and enforcement?
Is your business mature and stable enough to be consistent for several months at a time?
Do you have a high tolerance for contracts, rules, and legal conversations?
Going through this list, you’ll either feel mostly at home or very prickly. If you suddenly feel like you’re standing in an open field in a lightning storm, this probably isn’t the growth strategy for you.
And that’s fine. There are plenty of other ways to build a profitable business on your own terms.
Want to learn more about franchising? Dig into Entrepreneur Magazine’s annual rankings of the top 500 franchise opportunities for pricing, start-up costs, and terms. The easiest way to evaluate your own franchise offering is to review the buy-in packages from other companies.
Start-stop-keep: franchising and licensing edition
Ready to get started? Great, here’s what you do:
START thinking of growth as something you can fund through other people operating your model, not only through selling more yourself or borrowing money.
STOP dismissing licensing or franchising the minute you realize your role will change; for the right founder, the teacher-and-standards job is the whole point.
KEEP using one simple filter: only expand what you can train, support, and enforce consistently.
Need a sounding board for rethinking your growth strategy? Book a free 20-minute strategy session.
