Is Licensing an Alternative to Franchising Your Business?
If you’re looking to grow your business, expand the reach of your brand, and recruit qualified individuals to invest capital and open new locations and service territories, then licensing is not an alternative to franchising.
Here’s the reason why!
Why licensing is not an alternative to franchising
Because the franchise laws broadly define the types of relationships that qualify as and constitute a franchise. If the legal relationship that you are considering involves (a) the license of a trademark, (b) the payment of a fee, and (c) an agreement that creates a degree of control, then its a franchise and compliance with the franchise laws are critical. Below we’ll discuss why and how, with proper planning and mindset, you can turn franchising into a major advantage to the growth of your business.
The issue of franchising vs licensing comes up often and, usually, out of fear of franchising or misinformation, some are led to believe that if they can avoid franchising by structuring a license agreement supplemented by some other agreements, like a training agreement. Under this scenario the parties call it a “license” there are upfront fees but they are called “training fees” or something else and there is a form of agreement as to what the claimed licensee can and cannot do with the licensed mark. If a lawyer is involved, many times, the effort to avoid franchise regulation will be an effort to limit the degree of control that you have over the licensee’s business.
Why licensing doesn’t work
Does this work? Much more often than not it doesn’t. We’ve seen many clients that have taken this approach (with good intentions and on the advice of their local counsel), they grow and….what happens next? They’re contacted by a state regulator that claims their license is an illegal franchise or a licensee challenges the enforceability of their license agreement.
The reason is because the franchise laws are broadly defined and no matter what you call your agreement, if it involves a license, a fee, and some degree of control then it’s a franchise. When someone is replicating your business – opening new outlets or servicing new territories – you need to control how they use your mark, the products and services they are authorized to provide, and the systems and supply chain they need to follow.
Are there advantages to franchising?
The good news is that franchising your business is not difficult and if done correctly will serve as an advantage for the future growth and protection of the business that you are building. Imagine 2, 3, 4, and 5 years from now as your franchise system grows, your future valuation will be tied to the value of your royalty stream and the enforceability of your agreements. If your agreements are licenses, they may not be enforceable and the future value of your business may be undermined.
By Charles Internicola February 22, 2021
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