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What is the difference between a licensee, distributorship, and a franchisee?

Guest post by: Eric Stein

Article Overview: Defining the meanings between the various home business opportunities.

What is the difference between a licensee, distributorship, and a franchisee?

Distributorship - this is when a manufacturer of a supplier of some sort of product requires a 3rd party to market, sell, and deliver that product in a designated area. A perfect example is that of a beverage manufacturer. The manufacturer in question may not have the means to distribute their product far from their home offices. So instead of hiring employees in selected cities, they sell the rights to distribute the beverage in specific territories. The benefit to the manufacturer is that they do not have to hire an employee and keep tabs on that employee from a far. They also have a representative that is financially vested, so the chances of losing that representative are far less than if they had an employee in the area. The downfall to the manufacturer is that they potentially give up some revenue. But that's where the benefit to you, the distributor, comes in because that revenue goes right into your pocket. Licensee - an individual or company that acquires the rights to a legally protected property owned by another individual or company (the Licensor). The licensee is then free to utilize that property. The benefits to the licensor and licensee are much same as in a distributorship in that the licensor gives up potential revenue, revenue the licensee ultimately earns, in exchange for a vested partner.

Franchisee - a franchisee is one who purchases a franchise from a franchisor. In a franchise system, the franchisee must operate under specific guidelines set forth by the franchisor. Those guidelines include everything from how to operate the business and how to use the company brand name. Franchisors have much more control over the processes and guidelines that the franchisee function within. Whereas a licensee or distributor typically pays set fees, a franchisee typically pays a royalty in the form of a percentage of their gross revenue.

The lines between the three can often be blurry. In fact, the government is always on the look out for companies that have classified themselves as a distributorship or licensor, but in fact are operating as a franchise. For instance, an auto-repair shop can't just license out their name, asking "licensees" to pay a fee in exchange for opening additional retail outlets under that trademarked name. This tiptoes the line of a franchise. More often than not the key indicators are the combination of how the brand name is used and how payment is collected from those that buy into the system. Additionally, a franchisor typically offers more support and training than does a distributorship or licensor.

In all cases, make sure you and a business or franchise lawyer review the contracts in detail. Franchises are governed much more than any other business opportunity, so in most cases the contract presented by all non-franchised business opportunities will need to be scrutinized a bit more.

A few terrific sources I recommend for more business term definitions are BusinessDictionary.com, LegalExplanations.com, and the definitions section of USLegal.com.

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Article Tags: distributorship, franchisee, home business opportunities, licensee



Related Forum Posts
Re: STARBUCK - Licensing vs Joint venture - [quote="bmueller47":czemqiul]I often come here to learn something, therefore I would like to know what is the real practical difference between licensing and franchising. I might have an answer, but you are at the forefront with your knowledge.[/quote:czemqiul] Very good question. Although I am not an attorney, I will do my best to highlight what I believe are the main differences between franchising and licensing. First, here in the US, franchising is very regulated buy the Federal Trade Commission. Not anyone can franchise, you have to go through various steps. Licensing doesn't come with as much regulation. The franchisee can expect to have a very close relationship with his franchisor. In most cases, the franchisor will offer training, and on-going support. The franchisee will be able to use the franchisor's copyrights, trademarks, logo and so on. The franchisee is like the public face of the franchisor. This is I think the high value of franchising. Also, a franchise agreement will most likely define territories. The relationship between the licensee and the licensing company is much looser. In most cases, the licensee won't be able to retain the rights to trademarks, company name, etc and will have to establish his own identity in the marketplace. Licensees rarely get a protected territory which means you next door neighbor could be your competitor... Obviously, franchising is more expensive than licensing because you get a certain "safety". Again, franchising is highly regulated whereas licensing is not. There are many other differences between franchising and licensing but I think these are the main ones.
Dispute between Supplier and franchisee - This very much depends on the attitude of the franchiser. A good franchiser would be more than a little concerned about a franchisee not paying the bills purely from the perspective that it might tarnish the brand name. However, be aware that this might be struggling franchisee with a company that couldn't give two hoots about you being owed money. Personally I would be inclined to approach the person first and inform him or her of your intentions to talk to the franchiser before you actually do. This at least gives the franchisee the chance to rectify the situation.
Licensing & Technology - BigJim22 Without knowing the facts - I would definitely consider the licensing option. It is cleaner and easier for both parties - and means that you can pretty quickly start to generate a revenue stream which you can use to re-invest or reward patient shareholders (if appropriate). The License will definitely generate cash for you quickly. however, I think that there should be a clear understanding that any improvements made by the licensee should, before being made public, be the subject of a provisional or provisional patents applications - held co-jointly. Most technologies are quickly superceded by the next generation and that should be protected. Of course, there could also be a cross license from the new licensee and the original provider. The thing is, you still want to control your IP - and the license should reflect this. Hope this helps.
Dispute between Supplier and franchisee - The franchisee is a totally legally separate entity from the franchiser, and frankly it is no business of the franchiser. And the most important reason you are also likely to totally alienate the franchisee. I don’t know enough about your relationship with franchisee to comment on the rights and wrongs: but I do know this - If there was even an ounce of "right" on my side in the non payment, and certainly if my problem was the franchise model was not working, I would make it my mission to delay payment all the way to the courtroom door anyone who was so sneaky as to go behind my back to the franchiser.
Franchise Territories - [quote="franchisebrief.com":1dfdbmhp]This information will be included in the UFOC. If the UFOC states that there is no protected territory, then I would be suspicious. If UFOC states that each franchisee will have its own territory, then there should not be any problem.[/quote:1dfdbmhp] Any franchises that I'm familiar with have a territory or distance provision that prevents franchisees from overlapping their territories. This is only a problem when you have an underproducing franchisee - but they should also have a provision to give a franchisee a set amount of time to make a go of the location and territrory. Shri


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