From: alexhormozi
A licensing model is one of four primary vehicles an entrepreneur can use to package services, labor, and knowledge into a profitable business that scales to multiple locations and builds enterprise value [00:00:46]. This model allows businesses to leverage their existing knowledge or intellectual property (IP) for growth [00:03:59].
Key Characteristics of a Licensing Model
Unlike a franchise, which requires the presence of a name/brand, business systems, and a fee [00:03:09], a licensing model typically incorporates only two of these three components [00:03:32]. Operating as a license while using all three components of a franchise would be considered an illegal franchise, potentially leading to fines or shutdown [00:03:19].
Examples of licensing structures include:
- Name and Fee without Business Systems CrossFit is cited as an example, providing its name and charging a fee, but not dictating specific business systems [00:03:36].
- Fee and Business Systems without a Name/Brand (White-Labeled) A model where all operational aspects are licensed for a fee, but the licensee operates under their own brand [00:03:44].
Advantages of Licensing
The licensing model offers distinct benefits, particularly for newer entrepreneurs or those seeking rapid expansion:
- Low Cost to Start It typically has almost no initial cost for the licensor to set up and license out the model [00:10:27] [00:11:10].
- High Cash Flow and Margins Similar to franchising, licensing models generally have very high margins [00:10:32] [00:11:11]. They can generate cash flow from day one [00:11:13] [00:11:14].
- Speed to Market Share Licensing allows for rapid scaling and capturing market share quickly, as the model can be spread without the high capital investment or legal complexities of a private chain or franchise [00:13:25] [00:13:27]. This is particularly useful when the intellectual property (IP) is easily copied [00:13:12].
- Lower Risk Appetite Requirement It suits entrepreneurs with a lower appetite for upfront risk or investment, as it generates cash flow much sooner than other models [00:12:46] [00:11:26].
Disadvantages of Licensing
Despite its advantages, the licensing model has notable drawbacks:
- Low Defensibility It is not highly defensible, making it harder to protect the business model from replication [00:10:41] [00:10:43].
- Low Enterprise Value on Exit This model typically yields very low multiples upon sale, unless there is a “ridiculously sticky” licensing agreement with high yearly retention (e.g., 80% or higher) [00:10:46] [00:11:00]. This means a larger portion of the financial gain is realized through ongoing cash flow rather than a significant lump sum upon exit [00:13:36] [00:13:38].
For a comprehensive understanding of scaling business delivery models, it is crucial to consider the trade-offs between cash flow, upfront investment, time to profitability, and enterprise value on exit [00:12:46].