Definition of Licensing & Franchising

by Cheryl Munson; Updated September 26, 2017
Licensing and franchsing are BIG business tools.

Licensing, in the business world, is a contractual agreement to use a brand name, patent or property that is owned by another business entity. For example, a greeting card company can obtain a license to use images of Hannah Montana or "The Simpsons" characters on greeting cards.

A franchise is a business that operates under an existing brand name. Many popular businesses are franchises, including McDonald’s, Subway and H&R Block.


A franchise can help establish a business.

When a business enters into a licensing agreement to use a celebrity, characters or property, they become a licensee. A licensing agreement is structured, stipulating the terms and fees to use names and images on products.

Using the images of TV characters such as Hannah Montana or the Simpsons, or celebrities such as The Jonas Brothers, to sell products requires a license. A food or beverage manufacturer can become a licensee to use Splenda to sweeten their foods or beverages. A computer manufacturer can obtain a license from Microsoft to include their software, and become a licensee.


Licensing can help make a product sell.

Companies strive to create brands, characters and celebrities that they can license to other businesses. Licensing helps them increase their market share, drive consumer preference and loyalty for their artists and brands, maximize exposure and increase sales revenue.

Licensing provides the channel to do so without getting into businesses that are outside of their “core” operations. For example, Hannah Montana is a character/entertainer -- not a greeting card publisher or clothing retailer. But companies such as Wal-Mart are, and consequently will enter into a licensing deal.

Lawyers and agents typically serve as licensor representatives, responsible for structuring the terms and closing licensing deals. Licensors are paid royalties that are typically based on sales, along with an upfront fee for licensing usage rights.


If you want to open a business, you have several options. You can open a business under your own chosen name -- or opt to open a franchise.

By opening a franchise, a business owner gains instant brand and name recognition, employee training, and advertising and marketing support. As a result, franchisees often stand a better chance of becoming profitable, increasing the odds for business survival.


Providing franchise opportunities allows companies to expand locations and at the same time maintain control of their brand. Most often, this includes products, services, formulas, pricing, employee training and the overall look of the business.

Franchisors require franchisees to meet stringent qualifications, both financially and personally, before they are granted a franchise. They also require extensive franchisee/owner training. Franchisors earn revenue by charging fees and getting a percentage of sales revenue.

Some Businesses Are More Than One

Big businesses are often a franchisor and a licensee. For example, McDonald’s is a franchisor, selling franchise rights to qualified individuals to open a restaurant. McDonald’s is also and often a licensee for usage rights to images and characters from hit movies or television shows such as Spiderman or SpongeBob SquarePants.

Licensing and franchising can be good bets for entrepreneurs to make their businesses successful.

About the Author

Cheryl Munson has been writing since 1990, with experience as a writer and creative director in the advertising industry. She holds a Bachelor of Arts in journalism with a focus on advertising from the University of Wisconsin in Madison.

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