What’s the difference between investing in a licence to operate on a company’s behalf and a business format franchise?

The difference can be a lot, or not much! Certainly a big element of any franchise is the licensing of the franchisor’s brand to a franchisee as well as the franchisor’s know how and systems so, in that sense, a licence and a franchise are very similar but, and this is the really crucial difference, when you are granted a licence, you do not know whether the licensor has effectively “tried and tested” the elements which are being licensed to you to ensure that you can operate a successful and profitable business using them. You may be able to do so, but that is for you to find out.

In a franchise the opposite is, or should be, true. The whole point about franchising is that you are not simply being licensed with elements that are necessary for your business but, in addition, you are receiving the comfort of knowing that the franchisor has established that when using its brand, know how and system, you can operate a successful business. You know this because the franchisor has operated its own business, then pilot tested it, by operating a pilot franchise to establish that a third party following the franchisor’s systems can be successful and then when it is franchised, the franchisor will have successful franchisees.  It is for this reason that when you take a franchise you must obtain as much information from the franchisor about the performance of the franchisor’s other franchisees because, of course, if the franchisor does not have successful franchisees then you might as well take a licence which generally are cheaper but are less likely to be successful than a franchise.