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Franchise Buying Guide

Franchisees and Licensees--What's the Difference?

Think franchisees and licensees are the same? Our Franchise & Business Opportunities Experts explain how they're not.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Q: I'm currently looking at several opportunities. Some are franchises and some are business opportunities. Can you tell me the difference?

A: Telling the difference between a franchise and a business opportunity can get very confusing sometimes. But knowing the difference is important to understand before you sign on the dotted line.

The most common types of business opportunities are "rack jobbers," supplier dealer distributorships and vending machine routes. These are opportunities where the operator typically sells products or services supplied to him or her by the company or through an affiliated company. The company provides operators with outlets or accounts, or provides them with locations to set up vending machines or racks. The operator services customers by filling the machines and racks.

While some franchise systems also have these elements, the difference between a business opportunity and a franchise is in the degree of the relationship between the operator and the company. Here's a look at the differences:

Common Name
Franchise: A franchisee's business is identified by the franchisor's trademark.
Business Opportunity: The licensee may not be identified by the company's trademark.

Support
Franchise: A franchisee receives training, marketing and other support on a continual basis.
Business Opportunity: The licensee may receive very little, if any, in the way of support from the company-except for sources of products.

Standards
Franchise: A franchisee typically offers products and services on an exclusive or semi-exclusive basis and has minimal standards of performance set by the franchisor.
Business Opportunity: The licensee can usually handle a variety of different lines of products and services-some of which may compete with each other.

FeesFranchise: Franchisees typically pay a continuing royalty based on the gross sales of their business.
Business Opportunity: The licensee's payments aren't typically based on sales but on the purchase of products they make from the licensor.

Business opportunities have several advantages over franchising, the principal one being that business opportunities offer far more independence and flexibility than you would find in a typical franchise relationship. They also usually cost less to start up than a franchise in the same industry, and they don't usually require the licensee to pay a continuing royalty fee, as you would find in a franchise. It's often a good method for homebased, part-time or second-income businesses.

There are some significant drawbacks to business opportunities, however. The biggest is that you seldom receive any significant help in setting up the business, management systems, training and marketing, and you don't get much in the way of ongoing support either. In good franchises, it's the system provided by franchisors to its franchisees that's sited by franchisees for their success.

Franchisors like to say that in a franchise, you're in business for yourself but not by yourself. In a business opportunity, you're not only in business for yourself, you're usually also in business by yourself. If you're looking for the initial and ongoing support that comes with a franchise system, buy a franchise. If you're a rugged individual-then business opportunities could be for you.

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  • Not sure how to choose between a franchise and a business opportunity? Check out "Different Worlds."


Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummies and a former member of the International Franchise Association's Board of Directors and Executive Committee. Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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