Licensing vs. Franchising: Which Path Is Right for You?
Here are three factors to help you determine how best to expand your business through franchising or licensing.
Opinions expressed by Entrepreneur contributors are their own.
Whether you're deciding how to best expand your business or buy into a business, there are lots of factors to consider, from emotional to financial to legal and more.
When my first exercise machine came out in 2006, people started asking me: "Where are you going to open a studio? Can I open one?" I never had intentions of creating what Lagree Fitness is today, I just wanted to teach clients the method.
For me, I knew I didn't want to operate my business as a franchise based on my personality type, my management style and my passion for inventing – where I really wanted to continue to spend my time.
Now obviously, deciding to become a licensor or a licensee vs. a franchisor or franchisee will vary person to person. Having been a licensor for nearly 14 years with more than 450 locations in 30 countries (never having solicited any licensee) I have learned a lot. I can impart some insight to entrepreneurs looking to make their way into the business — the pros, the cons, what I've learned along the way, things I'd do differently in hindsight and things to look toward in the future.
The end message? Know your personality type, management style, how dependent or independent you intend to be and your goals for operating a business. Below, a few things to consider before making your decision.
What is your management style?
My biggest (and maybe most obvious) piece of advice is to know what kind of personality type you have and to know your strengths and weaknesses. I personally chose to offer licenses because it was less of a headache for who I am personality-wise. I'm happy to train licensees in the method, but then I want them to go forth and open their own studio and all I want to offer beyond that is the best of luck! I didn't want to be involved. I'm not a micro-manager. I'm more of a big-picture kind of thinker, not detail-oriented. My strength is to think far ahead. I wanted to focus on the evolution of boutique fitness. I don't want to manage people or be bogged down with day-to-day operations. People will email me: "What color should I use for my logo?" "How high should the mirrors go in the studio?" "What type of stereo should I use?" These are all questions for a franchisor. I barely want to be involved in other people's business.
Considering your freedom and emotional attachment.
I believe freedom is so important in running your own business. As a licensee, you have total control over how you want to operate your business. The benefit of a franchise is that you have a unified brand, but in turn, you lose freedom. I've had a lot of licensees come to me as previous licensees and the takeaway is that a franchise is good for people to learn the business – that is up until you learn it so well you want to make it your own. My thought is that the licensee will work so much harder to make the business successful if they feel like it's theirs. You can't personalize franchises. I put myself in the shoes of a licensee and I'd never want someone telling me how to run my business.
Related: See the Top 500 Franchises of 2019
What are the finances and legalities involved in a franchise?
As a licensor, you might make less money than a franchisor, but it costs way less in administrative fees to operate a license. Also, back to personality – is the extra money worth the extra red tape? For some people, the answer is yes. For the licensor – you get money upfront for the agreement/licensee fee, but there is no participation in the operation, so you save on administrative costs. Another factor to consider is that licensees have royalty payments due to the franchise. Franchises are often more expensive to set up. I think a big deterrent of operating a franchise is that you are opening your own business just to be paid a salary. A benefit is that the franchisor makes all the corporate decisions – they pay for accounting, marketing, advertising – this can feel like a safety net and a sense of security for licensees. Legally speaking, there is a lot less legal tape to set up a license. It is an agreement with loose terms; it's easier, quicker and less expensive to set up a business as a licensee. It's also a lot easier to terminate an agreement as a licensee.
Stay on top of agreement terms.
Things change. If your licensee agreement has an exclusivity clause, I highly recommend including renegotiation terms every 3, 5 or 10 years. Exclusivity creates a breeding ground for copycat products to bypass the license by offering something similar so they can operate in a desired location. I was too naïve 10 years ago; I didn't think my competition would come from my own licensees who would make their own version of my machines.
Have a balance of corporate-owned studios vs licensees
This I believe would help to streamline the brand's messaging and communicate the brand's personality to consumers. Because licensees do have so much freedom, sometimes the messaging of what I created this brand to be gets lost in the licensees' own interpretation and causes confusion among consumers.