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Franchising vs. Licensing: What’s the Difference?

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Franchises and licenses are both business agreements in which certain brand aspects are shared in exchange for a fee. However, a franchising agreement pertains to a business’s entire brand and operations, while a licensing agreement only applies to registered trademarks. Franchises typically work best for service-based businesses, while licenses are more conducive to product-based businesses. A licensee has more control over how they run their business compared to a franchisee, whose business will be dictated by the franchise owner (franchisor). However, a franchisee will also receive significant guidance and training from the franchisor.

If you’re considering expanding your business, you may be exploring how to franchise your business. In your research you may have also come across licensing and be wondering what the difference is between the two and which will best serve your expansion goals.

While franchising and licensing have some similarities, they are two very different agreements that mean different things for both you and your brand. In this franchising vs. licensing comparison, we’ll explain the differences between the two, as well as the pros and cons of each. Let’s get started.

What is franchising?

A franchise is a business agreement between a franchisor and a franchisee. The franchisor is the owner of a business. The franchisor sells the rights to their brand—including products and services, intellectual property, and more—to a franchisee who will open up a separate branch under that brand’s name, which is essentially a duplicate of the original business.

As part of the franchise agreement, the franchisee will pay fees to the franchisor to open a franchise, use their brand, and for advice and business support. The franchisor loans their brand for a fee and provides training, as well as expertise, to the franchisee.

Franchising is a deeper, more complicated business relationship and agreement than licensing. A franchisor retains control over how their brand is used and how each franchise under their name is operated. There is a lot of interdependence between the franchisee and franchisor in a franchise relationship.

Franchising examples

One of the most famous examples of a franchise is McDonald’s. From a modest start, the McDonald’s franchise now has more than 36,000 restaurants around the world.

Other famous franchise businesses include:

  • Burger King

  • Marriott International

  • Baskin-Robbins

  • Ace Hardware Corporation

  • The UPS Store

Many chain restaurants and other well-known businesses operate as franchises. The key with franchises is that no matter which one you visit, it will always look and feel the same, offer the same products and services, and more.

What is licensing?

Licensing, on the other hand, is a limited, legal business relationship where a specific party is granted rights to use certain registered trademarks of a brand. The business relationship is between the licensor (the one who owns the trademarks) and licensee (the one who is granted rights to use them).

To use the registered trademarks of another brand, the licensee pays the licensor an agreed-upon royalty fee.

Licensing examples

Two of the most famous brands that operate licensing agreements are Disney and Calvin Klein.

Calvin Klein works with a number of manufacturers under licensing agreements. This means that the Calvin Klein company has licensed, or loaned, its brand and trademarks to certain manufacturers who then use the brand to sell their products. Calvin Klein products such as underwear, perfume, and jeans are all produced and branded under licensing agreements.

Using a recognizable brand name like Calvin Klein under a licensing agreement can help a lesser-known brand get their well-made product to the market and trusted by consumers faster than they would if they had to build their own brand from scratch.

Another example of a brand that uses licensing agreements is Disney. When you purchase items emblazoned with Disney characters, it’s most likely that the product wasn’t actually manufactured by Disney. More often, Disney signs licensing agreements with certain producers to use their characters and images, which is why you find Disney characters on everything from soap to sleeping bags to T-shirts and clothing.

In general, licensing agreements are most often used by brands that are highly recognizable and marketable. For a licensing agreement to be beneficial to both parties, the business branding must already be successful and known by a large portion of buyers.

How franchising vs. licensing differ

If you’re looking into franchise vs. license agreements, it’s probably because you’re looking into either building your business into a franchise business or loaning your brand to another company for use. Knowing the differences between these two business agreements is key before jumping into a legally binding agreement.

While some business owners may look at licensing as an easier alternative to franchising, this would be misguided. These two types of agreements are legally very different and are appropriate in different scenarios. Businesses that would make for good franchises would not necessarily make for good licensing agreements, and vice versa. Let’s take a closer look at how licensing and franchising differ.

1. Limitations

One of the major differences when it comes to franchising vs. licensing is the limitation placed on licensing agreements. A license is much more limited than a franchise.

A license agreement allows for the use of registered trademarks, nothing more. Franchise agreements, on the other hand, allow for the use of trademarks, additional intellectual property, products, services, operating manual, and much more.

2. Control

Another difference between franchising vs. licensing is the amount of control that can be exerted by the seller over the buyer.

In a franchise agreement, the franchisor can lay out specific guidelines for how the franchisee markets the business, uses brand trademarks, where the business is located, and how the business is operated. In other words, the franchisor can exert a significant amount of control over the franchisee’s business and how it operates—because it is essentially an extension of their own business.

In comparison, a licensor has very little control over the business of a licensee. The licensor can make stipulations in how protected marks are used by the licensee, but they can’t control any other aspects of the licensee’s business.

3. Type of business

The type of business that grants a franchise is generally different than a business that operates with a license.

Most often, businesses that grant or purchase licenses deal with products. Licenses are great for adding a well-known brand or image to a product, such as clothing or other consumer goods.

On the other hand, franchises are generally service-based businesses. Most businesses that form a franchise operation are chain restaurants, hotels, cleaning services, auto repair shops, software repair companies, etc.

4. Legal regulations

In general, a franchise agreement is a much more stringent and complicated agreement. There are many moving parts within a franchise agreement, where a licensing agreement is a simple loan of certain protected marks or images.

In both instances, general contract law is followed for both licenses and franchises. In addition, there are specific federal regulations for franchises at the federal level and some additional requirements set down by certain states.

When starting a franchise, there are a lot more legal hurdles and regulatory requirements that must be followed than with a license agreement.

Pros and cons of franchising vs. licensing

Understanding the differences between franchises and licenses is only the first step in figuring out which is the right business model for you. It’s also beneficial to understand the benefits and drawbacks of both licenses and franchises.

Franchising pros

One of the pros of becoming a franchisee is all the benefits of being a self-employed business owner without the risks of starting a new business. Franchises come with the bonus that they’re already a proven business model with a pre-established customer base. Purchasing a franchise is often much less risky than starting a business from scratch, and while there can be significant fees involved, they may amount to a smaller investment than if you were to build your own company from scratch.

Franchising also has the benefit of a shared relationship. The franchisor gets to scale their business rapidly while minimizing some of the work, which is instead done by franchisees. Additionally, the franchisee works with the franchisor to manage the business and learn business skills that they may not know already.

In comparison to licensing, one of the big pros of franchising is the depth of the relationship between franchisee and franchisor. The franchise agreement may be complicated, but it also provides a wide-range of opportunities.

Franchising cons

One of the drawbacks for a franchisee is the loss of control. While it’s your business, most of the major business decisions will be made, or at least must be approved by, the franchisor. While this support can be beneficial while learning the ropes of the business, it can also feel like being micromanaged to experienced business owners. However, this control is a pro for the franchisor, as they can still dictate how their brand is used.

In comparison to a license, a franchise will seem much more expensive and complicated. Initial franchise fees can cost between $10,000 and $50,000—then there are the ongoing fees to keep in mind. This might seem exorbitant, but it’s important to remember that you’re getting access to an entire business. In comparison, a licensing agreement only gives you access to use specific trademarks in certain ways. So, a license will be cheaper and less complicated, but it also gives you access to a lot less.

Because of this cost discrepancy, business owners will sometimes opt for licensing agreements instead of franchising agreements; however, as we mentioned, these are not interchangeable and often do not work for the same types of businesses. Not to mention, you’re also putting yourself at legal risk by forming a licensing agreement for business operations that actually fall under the franchising category. If initial fees are prohibiting you from starting a franchise, you may want to check out these low-cost franchise options, or you can also seek out franchise financing to help you fund these expenses.

Licensing pros

One of the pros for licensing is the freedom for the licensee. In general, a license agreement happens between two established businesses. The licensee is purchasing the right to use protected marks that are already recognizable and appreciated by a built-in fan base. This makes licensing a secure investment and a great way to boost your business.

In comparison to franchises, another positive aspect of a license is the simplicity of the agreement. Because the license agreement covers the use of only one (or a few) protected marks, the agreement will be fairly simple and straightforward.

Licensing cons

The major con of licensing over franchising is the limitations. A license only gives access to use certain protected marks, nothing more. While this makes the agreement limited, that might be all your business needs. It’s also important when entering a licensing agreement to ensure you’ve taken these steps to protect your intellectual property.

Another con of licenses is that many people don’t understand their true purpose. There’s a lot of confusion over when to create a licensing agreement and when the licensing agreement is broaching the legal boundary of a franchise. Be sure to check with a knowledgeable lawyer before signing either a licensing or franchising agreement.

Is franchising or licensing right for your business?

When deciding what’s right for your business and evaluating franchising vs. licensing, you have to consider the needs and goals of your business.

If you’ll be the franchisor or licensor, it’s important to consider whether your brand is strong enough, widely recognized, and turning significant profits to the extent that it would do well either as multiple branches or emblazoned on products other than the ones you currently sell. If this is true and you run a service-based company, then franchising may be the right move. If it’s true and your company is product-based, licensing may be best. Either way, you’ll want to consult a trademark lawyer to protect your brand property, and then a business attorney to discuss the specifics of expanding your brand.

From the perspective of the franchisee or licensee, you need to think about where your business is within it’s journey. If you have a successful product-based business and are ready to grow, a license agreement with a recognizable brand could be an easy way to spur some quick growth. If you’re looking to start a business but prefer the lower level of risk an established brand offers, and are also looking for a hands-on mentor to guide you, a franchise is your best bet.

The final word

At first glance, licensing may seem like an abridged version of franchising—granting rights to only trademarks, instead of an entire business’s operations—however, the two are very separate agreements that should be used under different circumstances and for different types of businesses.

Both franchising and licensing are legitimate ways to grow your business, but you will first need to weigh several factors, take a look at where you are in your business journey, and decide what your goals are before deciding if franchising or licensing is the right choice for you.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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10 Software Tools to Keep Your New Business Documentation Organized

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When it comes to documenting SOPs, training materials and other important internal business processes, what’s one tool or software (not your own) that you would recommend new business owners use, and why?

These answers are provided by Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most successful young entrepreneurs. YEC members represent nearly every industry, generate billions of dollars in revenue each year, and have created tens of thousands of jobs. Learn more at yec.co.

1. Google Docs

Stay simple and use Google Docs. With direct edits and commenting features, it’s easier than ever to constantly improve upon your living documents. That way, your SOPs can continue to evolve along with your business.

Firas Kittaneh, Amerisleep Mattress

2. Loom

You can use Loom, or a similar screen-recording software, to record short videos for your team and create sections within the platform to optimize your SOPs and onboard new hires. Video information is easier to retain for most and is also easier to look up again and parse out. Certain processes are timeless and can also be used if someone needs to take over a process in an emergency.

Matthew Capala, Alphametic

3. GitBook

Although Google Docs is an elegant and convenient resource, I think GitBook might be the next best thing. It’s far more functional than a simple Google Doc, since it allows you to structure your SOP more like a wiki page or a full website instead of a handful of files in a folder.

Bryce Welker, Testing.org

IT documentation

4. JobRouter

JobRouter is one tool that I love using for documentation purposes. It helps you manage your documents from creation, editing, approval, release and distribution. It also integrates beautifully with Microsoft Word for ease of use.

Thomas Griffin, OptinMonster

5. Process Street

When documenting SOPs, Process Street is a great option. It’s a user-friendly process management software that allows you to create, track and schedule workflows. It also lets you create checklists, collaborate with your team, capture data and more so you have full control over your processes.

Stephanie Wells, Formidable Forms

6. Trainual

Trainual is a software that helps business teams run internal processes faster, better and smoother. A pain businesses face is maintaining performance as teams are assembled, grow, mature and are refreshed. The onboarding process is one process that plays a significant role in growing and refreshing teams but, if botched, organizational performance suffers. Trainual focuses on that onboarding.

Samuel Thimothy, OneIMS

7. Trello

While I wouldn’t necessarily recommend it for distributing official materials, an excellent system for organizing, commenting on and discussing internal documents among multiple teams is Trello. Trello allows you to share, sort and comment on documents in an easy-to-manage system. With their team functions, you can also ensure only those who need the materials will have unrestricted access.

Salvador Ordorica, The Spanish Group LLC

IT project management

8. systemHUB

One tool that I love using for any documentation purpose is systemHUB. It lets you integrate your existing project management software and continue working on it. You can replicate the existing documents or start from scratch as per your requirement. You can also share it with your team and do a lot more.

Josh Kohlbach, Wholesale Suite

9. ETQ

The most important thing about document control software is retrieving what you need when you need it. I like ETQ because it streamlines the entire process from document creation through retrieval and training. ETQ lets you set up permissions for employees to access the information they need and automation to notify employees of upcoming/pending training.

Matthew Podolsky, Florida Law Advisers, P.A.

10. Your Own Internal Wiki

Create your own internal wiki. There are many plug-and-play WordPress templates that are easy to use and pre-built to act as an internal wiki. Allocate a login to each employee, categorize content and use hashtags to make your SOPs and other processes easily searchable.

Chase Williams, Market My Market

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How Startup Studios are Bringing New Ideas to the Startup Space

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By Startup Studio Insider

Even as businesses have struggled through COVID-19, investors have been eagerly bringing capital to startups with the hope that new and fresh businesses will catch on and become the latest and greatest success. This influx of capital is primarily due to the exponential growth of new investment models that have exploded into the mainstream in the last five years. It is these new funding models that are helping connect entrepreneurs with investors who fit their wants and needs.

This new phenomenon of the ‘perfectly matching’ entrepreneur is a beautiful symbiosis capable of helping startups avoid risk, increase efficiency, and continue business development in a forward trend.

In this explosion of entrepreneur-startup matching, startup studios have developed almost a cult following. As many entrepreneurs have strong ideas, but lack the experience, finances, or team to bring them to fruition, studios provide a sort of safety net, capable of helping entrepreneurs deal with business and operational aspects, leaving them the time necessary to focus on ideas. With this initial investment, the special teams behind startup studios are mobilizing to mitigate risk for new businesses and help entrepreneurs focus on what matters most.

Startup studios are a critical competent of the startup and entrepreneurial space due to their capabilities to usher new ideas and practices into the industry. As this model continues to change the startup space as we know it, take a look at the list below to learn more about how a startup studio can single-handedly turn any entrepreneurial project into a juggernaut.

A Concrete and Singular Vision

Startup studios are built to do one thing and one thing well: build companies from the ground up. As this is the core initiative of these studios, they are better equipped than any other organization to take an entrepreneur from initial idea stages all the way to launch and beyond.

Because of this singular focus, startup studios are in the business of churning out these business over and over again. What this means is that they have not only repeated the process many times, but also standardized it down to a science. They’ve experienced every step of the process, and can often forewarn against roadblocks or concerns inexperienced entrepreneurs would plow headlong into.

Complete Operational Guidance

With the repetition behind the core of startup studios, they have a layer of shared resources which allow for a more rapid development and faster growth process than many other incubators or accelerators. From strategy playbooks to cross-collaborative teams, processes, and backing, these resources have allowed companies to take their development to the next levels.

Additionally, startup studios are invested in the process of developing a product beyond its launch. As such, many studios have developed programs to share resources and guidance beyond the launches from the startup studio and into the spaces beyond them.

Startup team doing planning

Oversight on Strategy

As startup studios are deeply entrenched in the day-to-day operations of their projects from the very start, especially when compared to incubators and venture capital firms, they are more capable of providing strategic oversight than other investment styles.

By utilizing a repeated process, as well as the experience of the entire team, these studios are capable of developing plans from the start, and imparting wisdom and experience onto younger entrepreneurs. This strategic guidance has been cited by many who’ve gone through the startup studio ecosystem as one of the most essential tools they’ve taken away from their experiences.

While the startup studio model is not for everyone, it is a true partnership that provides more than just financial backing. A studio is a great model for entrepreneurs who thrive off of teamwork and collaboration, and who may be looking to deepen their experience and learnings. While they can require flexibility and trust in their studio’s guidance, they are often a critical tool in pushing startups to the next level.

As the old adage goes, if you want to go fast, go alone; if you want to go far, go together. If you want to truly take your idea to the next level, consider developing it under the help and guidance of a startup studio. For more on startup studios, be sure to check out Startup Studio Insider, the newest journal providing daily insights into the startup studio space.

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5 Mistakes Business Owners Make When They Open a New Dental Clinic

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Starting a dental clinic is a daunting task, especially for young, budding entrepreneurs. The medical equipment can be pricey, putting the owner at great financial risk. Because of that, planning is a crucial step of the process that can save you a lot of money and stress down the line. Luckily, even if you don’t have experience running a business, you can learn most of these things.

photo credit: Tima Miroshnichenko / Pexels

With that in mind, here are the five mistakes business owners make when they open a new dental clinic:

1. Hiring Too Quickly

Due to high expenditures, business owners tend to rush the initial processes when opening a clinic. Hiring the right staff is crucial for your success, but unfortunately, some entrepreneurs make a decision for all the wrong reasons.

As a way of cutting expenses, lots of owners will hire young professionals straight out of school. Sometimes, they will put them on probation even if they have experience. When the time comes to hire them as full-time employees, they might not have enough loyalty to stay with your organization.

Having enough experience is crucial for dentists, but you also need to consider if this person is the right fit. Business owners neglect long-term plans and team suitability for short-term financial goals. Hiring a reputable professional is usually a better idea as it will bring stability to your team.

2. Not Creating a Beautiful Website

Word-of-mouth marketing was always crucial for companies, and it is especially important for small businesses such as dentistry. Unfortunately, getting those first clients is always a choir.

Many owners neglect the power of promotion, thinking that it’s enough to have a good service. However, unless you’re able to attract those initial patients, you will never be able to scale the business.

Having a great website is important as it sets up the basis for search engine optimization. Down the line, it will help you reach more people through Google. But it also works as a digital business card. Like your clinic, the website needs to be clean and to instill confidence in potential patients.

3. Ignoring Search Engine Optimization

Performing search engine optimization or SEO is a time-consuming job. However, small local companies can achieve great results in just a few months.

According to several professionals that conduct dental SEO by Dental Marketing Guy, local search engine optimization is an ideal way of promoting dental services to your local community. When a person looks for medical experts in their home city, your clinic should appear at the top of Google search pages. By investing some money in this promotional activity, you can get thousands of new clients in a short time.

Among others, search engine optimization is great for branding. Unlike other digital marketing activities, such as pay-per-click, the SEO results will remain even when you stop paying for the service.

Dental assistant working on a laptop

4. Not Having a Stellar Customer Service Plan in Place

We can argue that customer service is more important for dental clinics than most other businesses. This is because lots of patients are anxious before treatments and exams. Like with any other medical procedure, a person wants to be certain they’re in good hands.

Most patients are willing to pay extra for premium dental services. However, if you have poor customer service, it can dissuade them from giving you a chance. Even if they visit your clinic once, they might not return.

Retaining a patient is especially important in dentistry. Like with some other services, a patient is willing to travel long distances to perform an exam at the same clinic. Once a person chooses a dentist, they will likely return to the same person for most of their lives. And the lifetime value of one patient can be high.

5. Not preparing for the unexpected

Similar to other businesses, dental practices are subject to inherent business risks. For example, an equipment malfunction can set you back for months. In some situations, it might take weeks before you can get back to business. Losing a staff member can also be a major problem.

Although you cannot avert some potential issues, you need to have a contingency plan. First off, a business owner needs to have a healthy cash flow to cover any unexpected expenditures. Having debt is normal for dental offices, but you need to reduce liabilities as soon as possible.

One way to protect yourself is by getting insurance. Certain policies can cover dental practice overhead and provide you with income when you go on a hiatus.

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