Licensing or Franchising: how to develop your network

What licensing is and why it is useful

A licensing agreement (or licence to use ) is a contract through which the owner of an intellectual property right – such as a trademark , patent , or design – grants another party (the licensee ) the right to exploit it, in exchange for a consideration , often in the form of a percentage-based royalty .

Unlike franchising, licensing falls within the category of so-called “atypical contracts” under Italian civil law : it has no detailed regulation in the Civil Code, but relies on the principle of contractual autonomy recognised under Italian law (Article 1322 of the Italian Civil Code) , allowing the parties to freely draft any clauses they deem appropriate, within the limits of public policy and good morals .

This “normative flexibility” is a strength, as it allows the parties to establish highly diverse agreements tailored to specific needs. The following may be granted:

• Exclusive licences (only one licensee per territory) or non-exclusive licences (several licensees may use the same right) or sole licences ;
• Partial licences of the right (limited to certain products, markets or methods), rather than full use;
• Sub-licences , meaning the licensee may in turn grant the right to third parties.

Moreover, the parties may agree on time limits and confidentiality clauses (so-called NDAs , described in “ Accordi di riservatezza (NDA): come proteggere il valore delle informazioni ” ) or non-compete covenants (a restrictive tool that, due to its potential impact, must be handled carefully, as discussed in “ Non-compete clauses: a useful tool that must be handled with care ” ).

From the analysis of the two types of contracts, it becomes clear that there are many overlaps between franchising and licensing , and indeed, wherever a franchising relationship exists, a licensing element will necessarily be present as well. Yet, what are the differences between the two?

The differences between franchising and licensing

Both franchising and licensing serve to expand a brand , but they do so through very different strategies. Franchising is a closed and controlled system , aimed at ensuring uniformity and consistency in the experience offered to customers. Licensing , on the other hand, is open and flexible : it allows several parties to use the trademark in different contexts, provided that certain basic rules are observed.

From the perspective of the holder of the industrial property right – that is, the person who owns the trademark or the related right of economic exploitation – franchising and licensing represent two models involving very different levels of commitment.

In franchising , both Italian law and commercial practice require a high level of regulation : the franchisee relies on the network and on the support of the franchisor , who is bound by various obligations and warranties , both at the pre-contractual disclosure stage and throughout the performance of the agreement .

The franchisor must provide ongoing assistance , training , updates , and above all must take care of the protection of the brand , intervening in cases of improper use or trademark infringement by third parties. In essence, the franchisee pays an entry fee and royalties not only to use the trademark but also to receive continuous added value in terms of services , know-how , and brand protection .

In a licensing agreement , however, the logic is different. Both parties clearly understand that risk is shared : the licensee pays for the opportunity to exploit the intellectual property right, not for additional services, unless expressly provided. The price of the contract – the royalty – reflects solely the value of the right granted .

Another key difference lies in the power of control . In franchising , the franchisor normally has the right – and indeed, the duty – to conduct inspections , audits , and corrective actions to prevent misuse of the trademark, especially to safeguard the integrity of the entire network. Such controls form an essential part of the contractual structure and are crucial to maintaining the network’s overall quality.

In licensing , by contrast, control is not automatic : it must be explicitly provided for in the contract. Otherwise, the licensor may intervene only in serious cases, for example by terminating the contract for just cause in the event of counterfeiting or any use damaging the reputation of the trademark —circumstances that may also give rise to liability actions .

In short, all franchising arrangements include an element of licensing , but not all licensing agreements amount to franchising . Let us now see when each model is preferable .

When franchising is preferable and when to choose licensing

To determine which model is preferable, it is essential to assess what the business aims to achieve .

A restaurant brand , for example, that has developed a recognisable format featuring consistent recipes, furnishings and service standards, will find in franchising the ideal formula for growth. In this way, it can open new locations while maintaining a consistent customer experience , without compromising quality – an aspect explored in detail in “ Come costruire un format unico ma replicabile: il franchising ” .

Conversely, licensing may be useful to enter new markets , expand into different sectors , or simply to explore partnerships that might later develop into broader collaborations.

Often, the best opportunity lies in between : a licensing contract can offer flexibility while still allowing the licensor to impose standards on the licensee consistent with its legitimate expectations. Similarly, it is possible to include non-compete clauses , inspection rights , or brand conformity obligations .

There are also hybrid models , combining elements of franchising and licensing. For instance, a technology company may license its software while retaining control over technical assistance and partner training , thereby blending freedom with consistency . Likewise, a cosmetics brand may enter into co-branding agreements with other companies, maintaining the quality assurance typical of franchising while enjoying the flexibility of licensing.

In summary, the choice depends on three key factors:

• the level of control one intends to maintain;
• the organisational capacity available; and
• the growth objective pursued.

Franchising is best suited to those seeking to build a solid, coherent and long-term network .

Licensing , instead, is ideal for those wishing to expand quickly , with lower costs and greater operational freedom .

The most aware entrepreneur is the one who, before choosing, is able to assess their corporate identity , the resources available , and the strategic direction in which they wish to take their brand.