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Getting Started

Franchise or license?

If you aren’t equipped to grow your business organically, franchising or licensing could be the answer

Franchise or license?

If you’re looking to grow your company but don’t have the skills or resources to build and manage beefed-up marketing, sales and operations functions, franchising or licensing could be attractive options.

But even though some responsibility is passed onto others, they are not necessarily easy alternatives. Martin Brown, CEO of  Elephants Child, a growth strategy advisory firm, says: “These models shouldn’t be rushed into. You might think of them as quick and easy things to do, but actually there is a level of rigour behind them and a lot of research needed before choosing one of these strategic growth options.”

Franchising: replicating a successful business

Franchising is usually used to replicate a tried-and-tested business in new geographies. Instead of ‘doing it all again’, an entrepreneur could become a franchisor, and allow a franchisee to use their know-how and established brand to start a new branch, in exchange for an upfront franchise fee and a share of revenue.

The model is most common in the food retail sector, where it is used by giants such as McDonalds and KFC. But many other businesses also use it, including hotels, gyms, cleaning services, and even professional services firms such as accountants, lawyers and HR practitioners.

Franchisors need to prepare a comprehensive ‘operations manual’, which Martin says is often an enormous amount of work. And they also need to be prepared to help franchisees, pre and post-launch, with training, support and guidance.

He stresses the importance of thorough preparation and testing whether a business is actually ‘franchiseable’: “There has got to be something that is unique and special. The product or service needs to have a proven demand. And the model has to have been fully tested, both operationally and financially. You have to have proved that it can produce adequate profitability, cash flow and return-on-investment.”.

And even if a franchisor has proven the business model, success is not guaranteed. Martin says: “Testing something by yourself is one thing, but you really want to have it tested by laymen – potential franchisees.”

He also recommends that franchisors in the UK seek accreditation with the British Franchise Association. This carries weight when marketing the franchise and gives credibility to the proposition when being assessed by potential franchisees.

Licensing: even more hands-off

Licensing involves granting someone else the right to use or sell ‘something’ you own, such as a brand; trademark or patent; formula or recipe; or software, in exchange for a license fee.

Unlike franchising, licensors typically don’t provide licensees with an operations manual of ‘how’ to make money. That is up to the licensee. The licensor requires little, if any, investment in marketing, sales, or distribution, but does give away a lot more control, and revenue.

For example, an app developer, selling through the Apple or Google ‘app stores’, would be granting a license to Apple or Google to display, market and sell their app, but would have to give away around 30% of their sales revenue to these distribution platforms. 

Martin points out that licensing can be an attractive option for smaller businesses which have developed technology for use in industries that are difficult, and expensive, to break into, such as the aviation or automotive sectors. It might be sensible to license the technology to an existing industry supplier, which has established relationships and knows how to navigate complicated qualification and procurement processes.

Shrewd use of licensing can also provide new income streams. Companies with powerful brands – even unusual brands such as Transport for London’s underground tube map – can license this intellectual property to others and receive royalties, as Transport for London does when it allows others to sell memorabilia with the tube map printed on it.

Martin does however point out that this option comes with risk and needs to be carefully controlled. He says: “As a licensor, there is a lot of rigour you want to apply to make sure your reputation, ethics and your values are upheld. For example, you wouldn’t want your brand on a t-shirt that has been made in a ‘sweatshop’.”

He sees strong growth potential for both franchising and licensing, boosted in particular by a technology-enabled, flexible workforce, and the growth of the ‘portfolio career’: “You can easily imagine someone working from home, holding multiple franchises or licenses at the same time.”

​Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.