Thinking Of Expanding, Franchising, Or Licensing Your Indoor Playground Business? Read This First
When an indoor playground or play cafe business reaches a certain level of success and wants to expand its operations, two popular options include licensing and franchising.
While many of my members have opted to open a second location of their own, such as Elle from Pikopye’s Town in Austin, Texas or Renee from Mezanmi Play Cafe in Michigan–
It’s not always possible to comfortably or effectively operate multiple locations yourself due to life, time, or distance constraints.
That’s why many have opted to instead franchise or license their concepts, such as Play Cafe Academy and Play Maker Society members Gloria from Looma Space in Los Angeles, California and Tiffany from MY Play Cafe in Kansas City, Missouri.
While both the franchising and licensing models allow for the use of a brand name, trademark, and business methods, they differ in key aspects– so be careful if you’re tempted to use the words synonymously.
In this article we'll discuss the difference between licensing and franchising and the pros and cons of each– plus I will give you some basic steps if these are routes you’re interested in pursuing.
But before we get to that– let’s talk about the differences between licensing and franchising.
Licensing is an agreement in which a company allows another business to use its brand name, trademark, or intellectual property in exchange for royalties or fees. The licensee is granted the right to use the intellectual property but is not required to follow specific business procedures or adhere to particular rules.
Franchising, on the other hand, is a business model in which a company licenses its brand, trademark, and business procedures to an independent operator (the franchisee). The franchisee pays an initial fee and ongoing royalties to the franchisor in exchange for the use of the brand and ongoing support.
Now both licensing and franchising both operate on a very large spectrum, which you will hear more about on Friday in my interview with franchising expert Brian Beers– meaning that, while franchising does mean more ongoing involvement between the franchisee and franchisor, the degree of this support and involvement will be completely decided on a company-by-company basis.
In general, licensing will be much simpler and cheaper to execute– which we will explore shortly. A big downside, though, is you will have much less ongoing control over a licensed location’s actions.
But let’s dig in and talk some pros and cons of licensing from a business owner or licensor’s perspective.
Pros of licensing from a licensor’s perspective:
Lower Cost For Both Parties: Licensing is generally a less expensive expansion option than opening multiple locations of your own OR franchising, since the licensee only pays a fee for the use of intellectual property and not for ongoing support. This means you won’t need to create the same level of documentation or standard operating procedures as you would in a franchise model.
Less Regulation: In most states, regulation on license agreements is much less than a franchise agreement, reducing the associated time and legal costs with getting started
Flexibility For Licensee: The licensee has more freedom in how they operate their business as they are not bound to follow specific procedures or business practices. This can be GOOD, because it allows the licensee to adapt to their specific area’s needs and competitive landscape and not be tied to a specific model completely. This will increase their chance of success and may lead to more licensing opportunities
Less Ongoing Obligations: because licensing is simply charging for the use of a company’s brand and intellectual property, the licensor is not required to maintain ongoing support, training, or marketing for licensed locations. Some licensors WILL work in a monthly or quarterly fee to include some support, but this is less typical and again is decided on a case-by-case basis
Cons of licensing from a licensor’s perspective:
- Less Control For Licensor: The licensor maintains greater control over their OWN business, but less over that of the licensee. While this is beneficial from the licensee’s perspective as mentioned a moment ago– this can lead to a lack of cohesiveness in branding and operations, creating customer confusion and frustration. And again I will share some personal experiences with this and mistakes I made in my own process at the end
- Limited Growth Potential For Licensee: Licensing does not provide a roadmap for business growth nor does it provide ongoing support or marketing, which may limit the licensee's ability to expand. If a licensed location fails, this will severely stunt further efforts to license or expand by the licensor.
- Risk of Diluting the Brand: As I mentioned, the licensee's actions can affect the brand's overall reputation, so the licensor must carefully choose their partners to ensure their brand's integrity is maintained. The agreement must be as specific and enforceable as possible in order to protect the licensor’s brand, which is honestly easier said than done
OK– now let’s talk franchising and the pro’s and con’s from a business owner’s perspective.
And as a refresher, franchising is a business model in which a company licenses its brand, trademark, and business procedures to an independent operator (the franchisee). The franchisee pays an initial fee and ongoing royalties to the franchisor in exchange for the use of the brand and ongoing support.
Pros of franchising:
- More Control: Franchisees must follow the franchisor's specific business procedures, leading to a more cohesive and consistent experience for customers and increased brand reliability
- Ongoing support: Franchisees receive ongoing support from the franchisor, including training, marketing, and operational assistance. While this is more work for the franchisor, it also often leads to greater results and success for the franchisee, opening the door for more growth opportunities
- Expansion Of Brand Recognition: Franchisees benefit from the franchisor's brand recognition, which can help attract customers and build credibility for all franchise locations, including the original. While licensed locations usually have fundamental differences between them, franchised locations are more likely to provide a consistent customer experience. While this is NOT always the case, it’s been my experience.
Cons of franchising:
- Higher Cost And Ongoing Effort: Franchising is generally more expensive than licensing for all parties involved, as franchisees pay an initial fee and ongoing royalties to the franchisor. While this arrangement can be highly profitable for the franchisor, it does require much more work and hours per month as well as upfront
- Loss of Autonomy For Franchisee: Franchisees must follow specific business procedures, limiting their ability to adapt to local market conditions as a licensed location would likely be able to
- More Regulation: Franchises in the United States are regulated by the Federal Trade Commission (FTC). The FTC requires franchisors to provide potential franchisees with a disclosure document that outlines the terms of the franchise agreement, including the fees and royalties that must be paid. The FTC also requires franchisors to provide potential franchisees with a copy of the franchise agreement before they sign it. Additionally, some states have their own franchise laws that may require additional disclosures or regulations. This is all typically much more expansive and robust and much more expensive and complicated to put together than a licensing agreement. While many states do still have regulation on licensing agreements, they are typically not as expensive or difficult to navigate or adhere to.
So to wrap this section of the article up, both licensing and franchising have their pros and cons. Licensing is more flexible and less expensive but provides less support and limited growth potential for licensees and less control for licensors.
Franchising is more expensive but provides an established business model to the franchisee, ongoing support, and built-in brand recognition. Before choosing between the two, businesses must weigh their options and consider their long-term goals and growth plans and choose the one that feels best for them.
Before we talk about the steps you’ll need to take to license or franchise, I wanted to round this expansion conversation out a bit by also sharing some pros and cons of opening another location yourself, as PCA members Renee and Elle did like I mentioned at the beginning.
Pros Of Opening Your Own Second (or Third, Fourth, etc) Location:
- More Control: By opening a second location, you the business owner can have greater control over the operations and management of the business, ensuring consistency and quality across all locations.
- Increased Profit Potential: Adding a second location can increase your business's revenue potential as it reaches a wider audience and attracts new customers. Even though I decided to go the licensing route since I was just not up for managing a second location with a newborn and a toddler, our locations did feed each other’s profits. For example, if someone called location A to book a party and they were booked, we could easily refer them to location B and be confident their experience would still be excellent. We also were able to offer a wider range when it came to party styles and price ranges with multiple locations who were technically independently operated, but still under one parent brand
- More Brand Recognition: Expanding the business with additional locations can help to establish and strengthen brand recognition in the local market.
- Easier to Manage: Opening a second location can be more manageable than franchising since the owner can oversee the operations and training of staff at both locations, and does not need to spend time overseeing or supporting the franchisee.
Cons Of Opening Your Own Second Location:
- Higher Costs: Opening a second location can be expensive, requiring a significant investment in real estate, equipment, build-out and staffing. If you decide to go the licensing or franchise route, the franchisee or licensee will take care of all of these costs
- Time-Consuming: Expanding the business with another location can take a lot of time and effort, diverting the owner's attention from other important aspects of the business including sustaining the original location(s).
- Increased Risk: Opening a second location comes with increased risk as it may not generate enough revenue to cover the additional costs– and this will be the sole responsibility of the singular owner, in this case, instead of spread amongst the franchisees or licensees and brand owner
- Limited Reach: Expanding with a second location can only extend the business's reach to a limited geographical area. While it’s absolutely possible to manage multiple locations a further distance apart, it does make it more difficult and increase the need to hire more help, increasing costs.
Alright, let’s say hypothetically after considering opening a second location yourself, you instead decide to embark on the licensing or franchising process, for whatever reasons are meaningful to you. Maybe it’s saving on start up costs, maybe it’s because you have limited time– again regardless of why you came to that decision.
I would highly recommend hiring a local lawyer who specializes in licensing and/or franchising. They will be able to translate all of this to YOUR specific situation and goals and help you make the best and most informed decision possible. This is one of those areas I would absolutely spend the money to hire a professional for assistance with.
So let’s say you heard those pros and cons and you’re maybe sorta considering franchising or licensing, and are convinced ONE of them will be the right call for you, but aren’t QUITE ready to hire help yet.
Here is an outline of the basic steps you’ll need to take to license or franchise your business.
And by the way, I just released an advanced, more in-depth version of this process for my Play Maker Society members since this is a process I am all-too-familiar with, so if you’re a member, login to your portal to check that out– I also included a template of an attorney-created licensing agreement and a franchise disclosure agreement you can get started with, it’s the one I actually used to license my indoor playground.
And if you’re not yet a member now’s the perfect time to join us, all that info is in the show notes.
Alright, here is a very basic outline of the steps you will need to take before licensing or franchising your business if you have a successful model you’re looking to expand.
And again, licensing and franchising differ in their steps a bit– so for this, we will be going through the steps needed to franchise, and I will let you know when we get to a step you can skip if you’re going the licensing route.
- Evaluate your business model and market potential. Before you begin the franchising process, you’ll need to make sure that your business is scalable and has the potential for success in other markets. You’ll also need to assess the demand for your products or services and determine whether there is a viable market for franchisees in other locations. Long story short, if your business is not already highly profitable and if you’re not making a sustainable living as an owner, franchising or licensing should NOT be considered as a way to generate cash. This could result in you getting sued for misrepresenting your model in the future.
- Develop a franchise plan. Your franchise plan should outline the specifics of your franchise program, including the initial investment required, the ongoing fees and royalties, the training and support that you will provide to franchisees, and the qualifications that potential franchisees must meet. Again, this is where I suggest working with a franchise consultant or attorney to help you develop your plan. If you’re going the licensing route, your plan will just need to include any initial training or support efforts as you will typically not be collecting ongoing fees or providing ongoing support
- Create a franchise disclosure document (FDD). The FDD is a legal document that outlines all of the information that a potential franchisee needs to know before investing in your business. It includes details about your business model, fees and royalties, the obligations of both the franchisor and franchisee, and information about the history and financial performance of your business. While this isn’t required for licensing agreements, it’s still a good idea to compile all of the information a potential licensee would want to know, even if it is less formally organized
- Register your FDD with the appropriate state agencies. Many states require that franchisors register their FDDs with state agencies before offering franchises for sale. You’ll need to follow the regulations of each state in which you plan to offer franchises. This can typically be skipped for licensing agreements unless your state has tighter regulations, but you should seek legal counsel if you’re unsure.
- Develop a franchisee recruitment strategy. Once you have your FDD registered, you can begin recruiting potential franchisees. You’ll need to develop a marketing plan that includes advertising, outreach to potential franchisees, and a system for screening and selecting candidates. Even if you plan on licensing, you’ll still want to determine how you’ll be reaching out to and responding to interested parties and closing the deal.
- Train and support your franchisees. As a franchisor, it’s your responsibility to provide your franchisees with the training and support they need to be successful. This may include initial training on your business model and operations, ongoing support and guidance, and marketing and advertising assistance. Again, even if you plan on licensing, you will still likely need to engage in support and training early-on. Now is the time to start documenting and streamlining your processes, investing in better tools and automation systems, and creating standard operating procedures like I discuss in episode 11 of this podcast.
- Monitor and maintain your franchise network. Once you’ve established your franchise network, it’s important to monitor its performance and ensure that all franchisees are operating according to your standards. You may need to provide ongoing training and support, and you may need to make adjustments to your business model or operations as needed. Again, even if you decide to license, you will still want to find a way to measure the success of your program. Most people who will be interested in entering into a future agreement with you will want to hear from and even contact current franchised or licensed location owners, so being able to stay in contact with them and facilitate this process can improve your chances of future expansion
While this is an extremely simplified version of the steps you’ll need to take– but this is a BIG topic and one that can take a year or more to actually execute.
If you would like hands-on help with expanding your business, regardless of the path you choose, I welcome you to join us inside of Play Cafe Academy and Play Maker Society using the link here!