User licence and franchising


There is sometimes a trend to generalise the term franchising, disregarding the differences that this institution presents with respect to the licence of use. Although both models are designed to encourage decentralisation of management, they are nevertheless different.

The user licence is the contractual agreement under which one party grants the other the right to produce or distribute a given product or service against the payment of a royalty. The licensing party retains the power to decide exclusively on the market target, the strategies to be implemented and the commercial development plan (a right that is mostly guaranteed by contract).

This business model is suitable for those companies that hold patents, technologies, trademarks or other competitive advantage, properties or assets that ensure higher profits than similar products manufactured and/or distributed by competitors.

By giving licensees more freedom in the management of the business, this business model could encourage the emergence of new competitors. In other words, the licensee could benefit from a transfer of know-how which no contractual clause envisaged by that institution could prohibit. By not joining the Licensor’s sales chain, the Licensee will be subject to fewer controls than the franchise, and therefore there is a risk of the appropriability or replicability of the technology.

The other form of continuous affiliation object of this article is the franchise model, a very widespread business in many sectors such as tourism, catering, retail.

In franchising, unlike the user licence, the owner (franchisor) offers not only the use but a real business model (normally, it is standardisable business) to the other party (franchisee). The consideration for this service is the payment of a royalty and the adoption of various agreements such as the purchase of products from the franchisor. The latter exercises significant control and constant monitoring over the franchisee’s activities.

The purpose of this model is to strengthen distribution and enable rapid expansion in international markets without losing control over the product.

This model can also be counterproductive for the risk of creating viable competitors for that product or service. Furthermore, if franchising allows rapid market penetration at low cost, it also implies a significant reduction in the franchisor’s profits.

Ultimately, we recommend the use of franchising when know-how is considered the core business. Instead, the user licence will be more appropriate when a leaner and lighter management is accompanied by a significant importance of the Brand.

Updated on 28/07/2020