What is the difference between a franchisee and a licensee?

Answer 1

First, let's make clear that this answer pertains only to the circumstance where the entity buying the license is operating a business under the name of the entity who sold the license.

A franchise is a type of license. The franchise agreement often limits the franchisee's ability to change the nature of the operations under the franchise license agreement. The buyer of the license is called a "franchisee" because they purchased not only the use of the name, but the processes as well.

Yet there are times when a company may have fewer rules as to how the business may be run, or what the business may sell. In this case, where there are fewer constraints on the buyer of the license, the buyer is often called a "licensee" because they purchased the use of the name with fewer restrictions on operations under that name. A good example: McDonald's sells a franchise license: a franchisee must follow all of their rules, including how to cook the food, how to advertise, what the staff say to customers, and other aspects of the business. If McDonald's introduces a "Road Kill Burrito", a franchisee is obligated to put it on the menu and serve it. The franchisee largely does not determine day to day operations.

On the other hand, Caterpillar dealers have a license to use the Caterpillar name and sell Caterpillar equipment and parts. While they cannot (generally) sell competing equipment, how each dealer runs the business is largely left up to them. When Caterpillar introduces a new product line (for example, light duty rentals), the dealers are not obligated to introduce that product or service. The licensee can largely determine the day to day operations. From a legal-regulatory perspective, the difference between a franchisee and licensee are slim to none. Regardless of the name appended to the relationship between the parties, disclosure documents must be prepared and filed with applicable regulatory agencies. These contain information about the grantor (franchisor or licensor), its background, management team, financial condition, intellectual property rights, services or goods provided, fees charged, contract terms, etc. The purpose of these disclosure documents is to give prospective buyers (franchisees or licensees) sufficient pre-sale information so they can make an informed investment decision.