Advantages and Disadvantages of Licensing and Franchising

What is Licensing and Franchising?

Licensing is a contractual agreement in which one company provides another company in foreign country access to its patents, trade secrets, or technology in exchange for a fee known as a royalty. The firm that grants such authorization to the other firm is known as the licensor, and the firm in the foreign nation that receives such rights to use technology or patents is known as the licensee.

It should be noted that not just technology is licenced. A number of fashion designers licence the use of their names. In certain cases the two companies exchange technology. Cross-licensing refers to the mutual exchange of information, technology, and/or patents across firms.

License agreements can be exclusive or non-exclusive, and they can cover a wide variety of intellectual property assets such as trademarks, copyright, patents, and music. License costs can be one-time set payments or ongoing fees depending on usage, sales, and other performance factors.

 A franchising agreement, like a licencing arrangement, includes one party granting another rights to utilise technology, trademarks, and patents in exchange for an agreed-upon payment for a certain period of time. The franchiser is the parent company. The franchiser can be any service provider, it can be a restaurant, hotel, travel agency, bank wholesaler, or even a shop, that has developed a distinctive method for creating and marketing services under its own brand and trade mark. 

The term franchising is quite similar to licencing. One significant difference between the two is that the former is connected with the manufacturing and marketing of goods, while the latter is associated with the services that are provided. Another distinction is that franchising is more stringent than licencing. Franchisers  set strict rules and restrictions about how franchisees should conduct business. Apart from these two distinctions, franchising and licencing are nearly identical. The uniqueness of the methods and techniques offers the franchiser an advantage over its competitors in the sector and entices would-be service providers to join the franchising system. McDonald’s, Pizza Hut, and Wal-Mart are just a few of the world’s top franchisers.

Advantages of Licensing and Franchising

 The following are some of the specific advantages of Licencing/Franchising :

1. Less expensive method: In the licensing/franchising system, the licensor/franchisor establishes the business unit and invests his/her own money in it. As a result, the licensor/franchisor is bound to make almost no international investment. As a result, licensing/franchising is considered, as a less expensive method of entering an international business.
    
2. Not liable for any losses: Since no or very little foreign investment is involved, the licensor/franchisor is not liable for any losses incurred by foreign business. The licensee/franchisee pays the licensor/franchisor fees that are fixed in advance as a proportion of production or sales turnover. This royalty or fee continues to accrue to the licensor/franchisor as long as production and sales continue to take place in the licensee’s/ franchisee’s business unit.
    
3. Lesser Risks: There are lesser risks of business takeovers or government interference because the licensee/franchisee is a local person who manages the company in a foreign country.
    
4. Greater market knowledge and contacts: Being a local, the licensee or franchisee has a better understanding of the market, as well as more contacts, which may be very beneficial to the licensor or franchiser in running its marketing activities.
    
5. Legal safety: Only the parties to the licensing/franchising agreement are legally permitted to use the licensor’s/copyrights, franchisor’s patents, and brand names in foreign countries, according to the terms of the licensing/franchising agreement. As a result, such trademarks and patents cannot be used by other companies in the international market.

Disadvantages of Licensing and Franchising

The disadvantages of licencing and franchising are as follows:

1. Risks of starting a similar business: There is a risk that a licensee/franchisee might start marketing an identical product under a slightly different brand name if they become skilled in the production and marketing of the licensed/franchised products. The licenser/franchisor may be exposed to intense competition in the industry.
    
2. Problem of secrecy: Trade secrets may be revealed to third parties in foreign markets if they are not properly protected. The licensor or franchisor may suffer significant losses as a result of the licensee’s/franchisee’s errors.
    
3. Conflicts and disputes: Over time, conflicts frequently arise between the licensee/franchisee and the franchisor/licensor over matters, such as the maintenance of accounts,  payment of royalties, and the disregard of standards for the production of high-quality products. These disagreements can lead to expensive legal disputes that affect both parties.