The game is in the name

Licensing or franchising?

Donald Trump means different things to different people, but everybody can agree that his name is, quite literally, his fortune.

Steaks, vodka, hotels, golf courses, residential buildings, a university, casinos – the Trump brand has appeared on just about everything you can think of. However, just because a product or building carries Trump’s name doesn’t mean the 45th President of the United States actually owns it.

The truth is that the biggest single source of revenue for Trump’s company comes from licensing his name out to third parties, who believe that its special "brand power" will help them sell their own products better. That means he gets paid even if the product, brand or property that his name is attached to fails.

There are always rules to running a franchise, and these rules are set by the franchisor.

Of course, the reason companies pay to use the Trump brand is to leverage the success of an already established brand. Nothing succeeds like success.

Licensing holds out the possibility for anyone to become as wealthy as Donald Trump – but how does it work?

Licensing versus franchising

Licensing and franchising are part of the same family. Franchising means copying a specific, already existing business model under a franchise agreement between the franchisor (who owns the brand) and the franchisee (who wants to run a franchise like Wimpy, Steers or Mugg & Bean).

There are always rules to running a franchise, and these rules are set by the franchisor. For example, the franchise operations manual will set out the standard operating procedures for the franchise. Marketing, staff uniforms and training have to be done according to the manual – the franchisee is not allowed to devise their own methods. More than that, franchisees have to invest a lot of capital upfront before they can get started.

Licensing is a bit different. There are some similarities to franchising – the trademark, for example, is controlled by the licensor (Trump won’t let you use his name just any old way) – but the licensee (who wants to make money off the licensor’s brand) doesn’t have to operate their business according to the licensor’s rules. 

In other words, the licensee is free to develop their own business model to sell the licensed product. For example, to sell Apple products, you have to enter into a license agreement with Apple (if you try to sell their products without one, you will be sued), but Apple won’t tell you how to run your business. What’s more, you’ll have the right to sell other brands.

Entrepreneurial spirit

People who want a low failure risk on a proven formula, with training and operational support, who don’t mind being monitored, and who, above all, have the start-up capital, will tend to go for franchising.

Licensing, on the other hand, is just the thing for entrepreneurs.

Let’s say you come up with a great business idea. You have to convert the idea into a product, get it patented, and then find a company that can do the production and pays you a royalty. Large wholesalers will typically pay 5% of gross sales. That might seem like a small margin, but it isn’t, because they carry all the risk associated with having to sell a product.

If it works out, it’s the perfect win-win situation. You don’t have to worry about ongoing expenses or overheads – provided your distribution partner does a good job of selling your product, you will earn money while watching your brand become a household name.

However, before you start counting your profits, you might need some help with negotiations. Unless you've negotiated a licensing contract before, you should probably consult someone who has, or risk losing control of your intellectual property.

BOX

The pros of licensing

·        An independent business model.

·        Entrepreneurs manage their businesses independently from the licensor.

·        No need for strict operational rules and procedures.

·        More freedom to market and distribute the licensed product.