When you have a great business model, there are two powerful ways to see it reach its full potential: either franchising or licensing your brand.
Either strategy can result in an incredible return on your investment. The main difference between franchising and licensing is the level of control you maintain. Ultimately, your goals for the company will determine which path is right for you.
But before you even consider franchising or licensing, you have to make sure you have a foolproof business concept. Resist the temptation to license or franchise your business right away.
With both of my companies, people were knocking on my door within the first few weeks looking for franchise opportunities. But at that point in time, with both Kale Me Crazy, a superfood cafe, and Yogli Mogli, a self-serve yogurt bar, I wasn’t ready. So I fended off interest and waited until both businesses reached a point where it made sense.
Once you have a proof of concept and your business is ready for franchising or licensing, here are some things to consider:
When you license your brand, you can’t tell your licensees how to run their businesses outside of a few ground rules.
If you take this route, you’re relinquishing a good bit of control—but you can still have broad guidelines. If you license your name to a makeup brand, for example, you could require that any products with your brand attached be organic.
- CrossFit gyms are licensed locations, so each has a unique set of methods and operating procedures. The general idea is the same, but the classes are different.
- Licensing is also a great option for celebrity products or big-name brands like the NBA or NFL. For example, a makeup company could purchase the right to manufacture and distribute beauty products that bear a celebrity’s name. Or the NFL will license their name to a clothing manufacturing company that will put an NFL logo on their products.
- Licensing also may be a better option when you have a patent (on a tech product, a utility, software, etc.) and are looking to profit off its name value.
When you have a business concept and want to maintain control over day-to-day operations, franchising is probably the better option.
Essentially, franchising provides much more control—especially in terms of how each location operates and the general look and feel of the locations—but also requires greater financial investment and responsibility. The setup and maintenance are also significantly more expensive.
When you franchise, each location is essentially an extension of your business—and you can set specific guidelines for how they’re run on a daily basis.
That’s why when you walk into a Wendy’s, you’re going to have pretty much the same experience, whether it’s in Atlanta or LA. When you sign up for a class at Orange Theory, you can expect the same routines, equipment, and look and feel as every other studio.
But setting up a franchise is a lot of work:
- You have to develop an extremely detailed operating manual. This will shape what the business looks like and how it’s going to operate on both a granular level and grand scale. For example, you can control the business operating hours, menu offerings, and/or services.
- It’s your responsibility to make sure each location follows its protocols and guidelines and to put a support system in place for franchisees so they have the resources they need to succeed.
- You’re required to do store visits periodically and hold franchise meetings for your franchisees.
- You have to handle all of the branding, marketing, and product development for the business.
Beyond the above responsibilities to franchisees, you also have responsibilities to the feds.
There are many annual processes when you franchise, including revisiting and updating your franchise disclosure statement, re-registering with the state, conducting company-wide audits, and more.
My philosophy on franchising is this: You need the right concept, the right franchisees, and the right locations. When those three elements are present, the business will thrive.
Franchising and licensing have different benefits and should align with your company goals.
With licensing, the process is much less complex than with franchising. This route entails much less responsibility, time, legal obligation and work. It’s much simpler than franchising, which requires constant support to franchisees, hiring legal teams, performing annual audits, etc.
But if you want significant control over the day-to-day operations at your brand’s locations, franchising is a much better option.
Sometimes entrepreneurs will try a hybrid approach, where they license their first few locations, then start franchising. But this is risky because you have little control over licensed locations, and one bad location could damage your brand. And many assume they can just convert licensed locations to franchises later on, but licensees are not always interested in franchising.
When I started my first business, I was very tempted to license the first location—but I’m glad I didn’t.
In my opinion, franchising is the best way to grow. You just have to be ready for the work it requires. Because franchising allows you to focus on the big picture—brand strategy, new product and service offerings, marketing, etc.
While franchising is quite an undertaking, it’s not as time-consuming as many think. Sometimes people ask me, “How do you run 21 stores?! I’d go crazy!” But really, I don’t—the franchisees are the ones handling day-to-day business functions. I simply oversee operations from a high level.
The franchise model has worked very well for both of my businesses, and I’m glad I took this path. There’s just one question left to ask: When you create a great new brand or business, will you franchise or license?