Written By: Gouri Ghosh

India's education sector is developing rapidly. From preschool to skill-training institutes, numerous brands are expanding rapidly, and investors are keen to get into the fray. But hold on, before you sign an agreement, and ask yourself one very important question: Do you choose a franchise or a license?

 But in reality, the decision between an education franchise and a license in India is far greater than it appears. It's not merely about how the business functions; it's about safeguarding your money and your future gains.

If you are not clear on the difference, you may fall into what we refer to as "equity traps." They can creepingly lower the worth of your investment and decrease your return without you knowing it.

Understanding the Differences Between License Or A Franchise

When you're considering starting an education business with a well-established brand, you'll have two primary choices: licensing and franchising. Both allow you to utilize a brand's name, but they are different, and it's wise to understand the difference.

Licensing

Licensing is when you pay to utilize specific elements of a brand, such as their course, training content, or even their name, but you are subject to certain rules. The person or firm that allows you to use these things is the licensor. But the licensor typically does not dictate how you conduct your day-to-day business operations.

Advantages of Licensing:

You have greater autonomy to operate your business and your style. You determine how to operate the day-to-day and make adjustments that suit your approach.

Typically, the costs you pay are reduced compared to franchising. Because the licensor offers fewer services, costs are lower.

Disadvantages of Licensing:

You receive less assistance from the brand, such as marketing assistance. This can result in you needing to work longer and harder to promote your own business.

Due to the fact that there's less control by the licensor, the quality of your products or services might not always be up to the standards of the brand. 

Some license agreements can have tough regulations or penalties if you wish to exit or discontinue the license, so be sure to thoroughly read through the agreement.

Franchising

Franchising provides you with so much more than the brand name. You have an entire business model — including step-by-step instructions on how to operate the business, marketing strategies, training, and systems to abide by. The franchisor, the company that owns the brand, typically operates many of the details of how you operate your business in order to maintain everything consistent.

Advantages of Franchising:

You enjoy a powerful, well-known brand that existing customers already trust. This aids in easily attracting customers.

The franchisor gives proven systems and continued support. This assists you in operating your business effectively, particularly if you are new to the business.

It's usually easier to attract customers and recruit employees because the brand is known and trusted.

Cons of Franchising:

The royalties and fees you pay are generally greater than those of a license. This is due to you having more assistance and a complete business system.

You have fewer opportunities to decide things yourself. You need to abide by the franchisor's rules closely in order to maintain the branding to be consistent.

Contracts tend to make it difficult to leave the business when you wish to. You may be required to remain for many years or pay penalties when you quit prematurely.

The "Hidden Equity Trap" Problem

You might end up with an investment that's difficult to expand, sell, or cash out of. That's an equity trap.

What is an equity trap in education transactions?

Overpaying for the brand

• Most investors overpay because the brand name is renowned.
• But the brand typically remains with the franchisor or licensor, not with you.

Too many rules restrain you

• Agreements usually govern significant aspects of the business, such as fees, class schedules, or suppliers.
• You might be the owner, but you are largely adhering to the strict guidelines of the franchisor or licensor.
• This restricts your autonomy to adjust or innovate in your domestic market.

IP laws make leaving difficult.

• The curriculum, trademark, or program typically belongs to the franchisor or licensor.
• When you choose to exit the business, you cannot make use of these.
• Certain agreements even prevent you from establishing a similar education firm for several years.

Hidden charges that decrease earnings

• You may have to pay additional fees for marketing, training, or software upgrades.
• These fees accumulate and reduce your net income.

Unclear promises of support or training

• The franchisor might commit to assistance but provide little in actuality.
• It becomes more difficult to operate the business without quality support.

Unrealistic expectations of growth

• Some brands make claims of quick student recruitment and lucrative income.
• However, the market might not be expanding that rapidly, which means you have fewer customers.

Limited pricing and discount control

• You might not be permitted to charge your prices or provide discounts.
• This may create more difficulty in enticing or retaining students in your region.

Investor Red Flags in Education

Most investors dive into education transactions without detecting red flags ahead of time. These red flags will cost you a lot more than you anticipate. Some key ones to be on the lookout for include:

Brand Lock-In

• Franchise contracts can hold you back with long-term deals.
• Even if your company is not successful, right now, you may not be able to get out easily.

Phantom Ownership

• You might own a share of the business, but the intellectual property (IP), such as the curriculum or name, is entirely owned by the franchisor.
• You can't sell, modify, or use these outside of the agreement.

Overhyped Projections

• Promises of large revenue and rapid student growth might be pretty on paper.
• But too often, these projections are made using idealized conditions, not actual market conditions.

Margin Erosion

• Royalty charges or licensing fees might consume a large portion of your revenues.
• This might leave you with a business that makes lots but barely profits.

Compliance Blindspots

Indian education regulations vary from state to state.

If you fall behind on any legal obligations, your business may be compelled to close rapidly.

How to Avoid Equity Traps when Purchasing a Franchise

Do a Legal and Operations Check

Contracts are tricky and filled with legal jargon. If you simply read it yourself, you may overlook key points or buried pitfalls. That's why it is wise to have a lawyer, preferably one with experience in the Indian laws regarding the education sector, review it thoroughly. They will be able to identify issues and ensure that you are safe.

Shift Brand Value from Business Value

The franchise fee usually covers the value of the brand (the name, logo, reputation) and the real business revenues (how much money the business generates). You need to know precisely what you're getting so that you don't overpay for the brand alone.

Ensure You Have Exit Options

If the franchise performs poorly, you don't want to have to pay fees or be locked into the agreement for many years. So, you should negotiate the terms of exit that allow you to exit or terminate the agreement if specific objectives or levels of performance aren't achieved. Thus, your risk is reduced.

Look at the Market Yourself

Franchisors might give you their statistics on how successful their franchise operates in your neighborhood, but that might be rosy or cherry-picked. Conducting your market survey, such as interviewing potential customers or researching competitors, allows you to have an actual picture of demand and success possibilities.

The Bigger Picture: Regulatory and Policy Signals

If you wish to purchase an education franchise or a license in India, it's critical to observe government policies and rules very carefully.

Current Situation

 They are coming up with new regulations that education franchises need to adopt. These regulations instruct franchises how to operate their business effectively and how to provide information regarding their outcomes fairly.

What Could Change Soon

Education franchises employ such items as customized lesson plans (curriculum) and recognized brand names to entice clients. Since these are significant, the government may implement new legislation that alters the amount of control the core company (franchisor/licensor) can exercise over you. Such new legislation could provide you with more autonomy and improved terms, i.e., secure and equitable investments for you.

Conclusion

Before you commit to purchasing an education franchise or taking a license of it, keep in mind that all brands are not equal. A recognisable name may sound appealing, but it does not necessarily mean that the business will be profitable or easy to operate. Knowing the fundamental difference between a franchise and a license is important since it has implications on how much control you will have, how your profits will increase, and how simple it will be to get out of the agreement if necessary. With this knowledge and by being alert for equity traps, you will be in a position to make better decisions that will guard your investment and see you develop a successful education business in India.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.