Setting up a new business is often perceived to be the hardest part, but so is growing a business in the right way without putting at risk an established brand and reputation. Other than growing organically, the key question we are frequently asked is “what are my options?”
The most suitable structure will depend on the circumstances of the business but typically the most common choices are either franchising or licensing. Both involve introducing one or more like-minded individuals into the mix and can be a great way to capitalise on revenue. The main distinction between the two is the level of control you can retain over your business.
A franchise agreement promotes consistency and stability through the replication of an existing business format (think McDonald’s or Domino’s pizza). The reason for this is that under a franchise agreement the franchisee operates its business under the franchisor’s trade name or trade mark under set rules for how it must be operated. This means that to the outside world the franchisee is the franchisor thus harmoniously preserving the brand, its value as a brand and the identity of the business. However, to do so requires a higher level of investment compared to a licensing arrangement.
The setting up of a franchise can often take time and be, initially, a relatively expensive process. The reason for this is there are several formalities a business owner will need to deal with prior to taking on a franchisee. These include carrying out necessary due diligence and the creation of a franchisee handbook to name a few. As well as these initial formalities, there is often an ongoing obligation for the business owner to provide support and training to the franchisee. That said, in exchange for this level of investment, the business owner can demand a franchise fee and a percentage of the franchisee’s revenue. The potential benefit to the business owner can therefore be relatively lucrative.
A license agreement is typically entered into on a shorter-term basis. A license agreement requires less upfront cost and enables the business owner to license for example an idea, design, name or logo in exchange for a license fee. Unlike a franchise, the business owner has minimal involvement and the licensee retains the control and freedom to market and operate its business as it sees fit. The drawback for a business owner for relinquishing such control is that the licensee could pose a risk to the brand and the reputation that may have taken several years to establish. There is also the risk that if the business owner attempts to retain a significant level of control over the licensee, the license may very well fall within the realms of a franchise and will therefore be subject to the Franchising Code of Conduct.
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