For a company looking to expand, franchising and licensing are often appealing business models.  It is important to distinguish the difference between franchising and licensing to determine which business model is more appropriate to a business.

Franchising

In a franchising model, the franchisee uses another firm's successful business model and brand name to operate what is effectively an independent branch of the company. The franchising party or franchisor gives the franchisee permission to not only use its intellectual property but also its operating system. In addition to their trademarks, franchisees often use frachisors' distribution systems and marketing campaigns to sell the franchisors' products or services. In return, the franchisee usually pays the franchisor an upfront fee, royalties, and sometimes even a monthly or annual fee. The franchiser maintains a considerable degree of control over the operations and processes used by the franchisee, but also helps with things like branding and marketing support that aid the franchise. Before offering a franchise however, a business must standardize its internal systems, operations, marketing and distribution. A business must also complete extensive legal documentation and draft franchising agreements before becoming a franchisor. Franchisees are also subjected to a lengthy and thorough selection process. Franchising usually takes longer and costs more to set up than licensing.

Licensing

A license is a contract through which one party grants another permission to use its patents, trademarks, copyrights, designs or trade secrets. The organization receiving the license, or licensee, compensates the licensor by paying a flat fee, royalties or a combination of the two. The agreement does not transfer ownership of the intellectual property. By licensing to third parties, small business owners can expand their businesses' reach and grow sales without having to invest in new locations or distribution networks, and risking failure. In this arrangement, the licensing company may exercise control over how its IP is used but does not control the business operations of the licensee. The documentation in licensing is far less extensive and typically only requires and licensing agreement and guidelines and/or specifications required to be followed by the licensee.

Both models require that the franchisee/lincensee make payments to the original business that owns the brand or intellectual property. In some jurisdictions there are laws that govern the franchising model and define what constitutes franchising.