Main Differences between Franchise and License Agreements

Both License and Franchise agreements facilitate the expansion of the parties’ businesses. While they have different structures and levels of control, both involve giving rights to use intellectual property (IP) or other know-how. Businesses need to understand how licensing and franchising work and the differences between the two.

What is a licensing agreement?

A licensing agreement is a legal contract in which an intellectual property owner (the licensor) grants permission to another party (the licensee) to utilize their IP. Licensors usually keep intellectual property ownership, whereas licensees concentrate on commercially exploiting the licensed materials.

What is a franchise agreement?

A franchise is similar to a licensing agreement. However, while it provides the franchisee access to the franchisor’s trademarks or brand name, it also involves proprietary processes and business knowledge. This arrangement allows the franchisee to sell products and services under the franchisor’s name. The franchisor can expand its business without incurring all the risks and costs of opening new locations.

Main differences

Understanding the legal distinctions between licensing and franchising agreements is crucial. Businesses that may thrive under a franchise model might not be suitable for licensing, and vice versa. The primary differences include ownership, control, business models, and regulations.

1. Ownership – In a franchise arrangement, the franchisee owns the business and operates it on behalf of the franchisor, but for a fee. In a licensing agreement, the licensee pays the licensor for a particular product, for which the licensor may hold patent rights. Nevertheless, the remainder of the business, which does not require the licensor’s products, can function independently.

2. Control and relationships – In a franchise arrangement, the franchisor grants the franchisee the right to operate a business under a specific brand or trademark. This arrangement also includes an established business model, allowing the franchisor significant control over the franchisee’s operations. Similarly, a license agreement allows the licensee to use the licensor’s intellectual property to manufacture, utilize, or sell products. However, in this case, the licensor does not provide a detailed business model and has little to no influence over the licensee’s operations.

3. Format – Franchise typically encompasses a comprehensive business model or structure comprising detailed procedures, operational protocols, and criteria that franchisees must adhere to. In most cases, franchises cover business models as a service. This includes hotels, restaurants, beauty salons, and others. The aim is to reproduce the franchisor’s effective business model in various locations. In contrast, a Licensing agreement generally entails providing permission to utilize a particular product, technology, trademark, or brand name. The licensee may integrate the licensed intellectual property into their business activities or products.
   
4. Fees – Franchise agreements typically require substantial upfront costs, including an initial franchise fee and royalties calculated as a percentage of sales. Furthermore, franchisees are often obligated to give a share of their profits to the franchisor. In contrast, licensing agreements generally involve paying royalties or licensing fees to the licensor, often determined by product sales or usage. Nonetheless, the financial terms can differ based on the specific details outlined in the agreement.

RoyaltyRange Royalty rates database

Our Royalty Rates Database serves as an essential tool for those seeking comparable licensing or franchise agreements from third parties. It contains high-quality information that complies with OECD BEPS standards. Each agreement is assessed using as many as 50 factors for comparability, and thorough summaries are included. The information is extensive, well-organized, and easy to analyze. Original agreements can be accessed in both PDF and online formats.

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The information provided in this article is intended for general informational purposes only and should not be interpreted as legal or tax advice. It is not a substitute for consulting with a qualified legal or tax professional.