Franchising · 13 January 2017

Franchising or licensing – How to avoid becoming a cautionary tale

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Pierre Cardin became a “cautionary tale” by licensing products too far removed from its brand and risking its reputation

If your business is doing well, you may decide to explore opportunities in franchising or licensing as an extra revenue stream. But which model is best for your business? There’s a bit of cross-over, but here are the main differences between the two.

A franchise is essentially a ready-made business. You’ve done all the hard work establishing it, and you sell it off almost as a kit to your franchisees. As part of a franchise, you will also have licensing agreements in place.

A license is an agreement to let someone else use a part of your business or branding, or do something that comes under your company’s specific “know-how”. They can then embed that part of your business in to their own pre-existing company, for a fee.


Franchising

One of the most well-known franchises is McDonalds, and it demonstrates one of the key factors that is necessary to make this sort of agreement work – whichever restaurant you go to, a McDonalds hamburger will always look the same.

If you franchise your business, your franchisee has to adhere to your particular quality control measures. They do things your way and they pay you a fee for the privilege of doing so.

This might sound like a dream come true to a small business owner keen not to relinquish any control over their business, but it comes with its own unique set of difficulties.

Allowing someone to open their own off-the-shelf iteration of your business comes with a reputational risk – you need to invest time and resources training them and quality checking them. You will need to provide ongoing access to help and support, and it can end up becoming very expensive.

Turtle Tots, a provider of toddler and baby swimming classes, is an example of a small business that has made a success of the franchising model as a way of scaling up. The company’s success lies in the dedication to initial training and ongoing support it offers to its franchisees.

Commercial director and co-founder, Caroline Sparks, said: “Turtle Tots franchisees receive world-class intensive aquatic training, and are also as qualified as they possibly can be with the Swimming Teachers’ Association.

“Additionally, they receive training on every aspect of running a Turtle Tots business – including sales, marketing, IT and more. Franchisees then receive ongoing support and training which includes business reviews and annual “Development Days”.

“Customer service and quality assurance is paramount and we have strict best practice guidelines that franchisees must adhere to. Regular CPD days and ongoing training ensure consistency of the brand and the customer experience too.”

This is a lot of work, and not something that any business should undertake lightly, but if like Turtle Tots you believe your business has the resources and skill to operate a franchise it can be very lucrative.


Licensing intellectual property

If when choosing between franchising or licensing you decide that perhaps you don’t need so much control over your business’ spin-off, you can look at licensing part of your company. This can include branding, know-how, or other intellectual property.

Licensing can be a cost-effective route into a new market, as you can license companies to produce products or services your company does not have the expertise to do.

For example, Disney licenses companies to create merchandise, and in return receives a fee or a cut of the profits. It could license a children’s clothing manufacturer to produce branded t-shirts, which would serve both companies well. The manufacturer would receive the added cachet of the name Disney, and Disney would get a fee or a cut of the profits.

However, a savvy business owner would do well to weigh up each licensee individually rather than just seeing a new potential revenue source. If you license products too far removed from your own brand you risk trivialising your brand name.

This is exactly what happened to fashion designer Pierre Cardin. Rather than sticking to perfumes and accessories like other fashion houses, Cardin handed out licenses to all manner of products, devaluing the quality brand name and earning its reputation as a “cautionary tale”.

Other disadvantages of licensing include losing control of your product – you may no longer have influence over the packaging, distribution, cost or marketing. Your brand name is on the line, and other people are calling the shots.

In addition, if you agree a royalties deal with your licensee and for whatever reason the products don’t sell you might not see any return for your leap of faith.


Licensing software, processes or “know-how”

Another type of licensing that companies can utilise is that of more intangible offerings. For example, a software license doesn’t mean you own the software, but simply the right to use it.

Businesses might have worked out specific processes, or developed software or coding that helps them in the day to day management of the company that they can then sell on.

One such business is Best Tours, a tour operator that comfortably operates over 100 curated tours in 12 cities, across the US, UK and Australia.

The business is highly scalable and operated from its London headquarters, so it had no need of a franchise model to expand its reach. However, in the process of growing the business it has developed its own admin systems and is considering licensing them to other companies.

Director of Best Tours, Ferry Hunt, said: “We’ve created a number of systems that make the running of our business a lot smoother. We’re able to sell these processes on to others without fear of them imitating the business, as they are administrative systems and don’t require us to hand over the rights to our name or branding.

“We’re currently in the process of putting together a press release announcing the licensing opportunities for these systems.”


Putting your reputation on the line

If you have decided you are ready to extend your business via a franchise or a license model, the decision between the two ultimately comes down to control.

If you want to keep an eye on the minutiae of the business, opt for a franchise model. Keep on top of your franchisees and accept the extra responsibility.

If you are looking for a new revenue source but you are stretched too thin for a full-force franchise, licensing may be the answer.

As with anything, apply due diligence and do your homework before launching into any large business decisions.

Franchising A-Z: The franchise journey – How to get the most out of it

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ABOUT THE EXPERT

Letitia Booty is a special projects journalist for Business Advice. She has a BA in English Literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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