skip to content
blog home General The Unintentional Franchisor: How a License Agreement may Subject You to Franchise Regulation.

“Franchising” has been and remains one of the most successful vehicles for the multi-unit expansion of a business.  However‚ for many entrepreneurs looking to expand their business and brand‚ “franchising” is too often disregarded as a viable business model. For these entrepreneurs‚ the establishment of a franchise system (unnecessarily) appears to be a daunting task and is disregarded in favor of “licensing”.  That is‚ in an “attempted” effort to avoid franchise regulation‚ but nevertheless achieve brand growth‚ the entrepreneur (as a “licensor”) licenses his or her trade name and trademarks to third parties (known as “licensees”) who conduct their own business utilizing the licensed marks.

Read: Licensing vs. Franchising Guide

While “licensing” relationships‚ without question‚ possess a legitimate purpose‚ they are extremely limited and cannot serve as an “end-run” around franchise regulation.  That is‚ license agreements cannot be used to create “franchise-type relationships” without the franchise regulation. The reason for this is simple: in the world of franchise regulation‚ “substance” matters more than “form”‚ labels do not matter and just because you call something a “license” does not mean that it is not a “franchise”.  In short‚ your license agreement (no matter what you call it) may in fact be a franchise.

So‚ how do you determine if your license agreement “crosses the line”? You ignore titles such as “licensor”‚ “licensee”‚ “license fee” and “license agreement” and evaluate the “substance” of your business relationship.  Under the federal Franchise Rule‚ the defining characteristics of a franchise include:

(1)    Continuing Commercial Relationship.  a “continuing commercial relationship”;

(2)    Agreement. a written or oral “agreement”;

(3)    License. the “license” of a trademark;

(4)    Control / Obligation to Support. “significant control” over your “licensees/franchisees” methods of operation‚ or‚ an obligation to “support” those operations‚ and

(5)    Fee. the payment of a “fee”.

Since‚ factors (1)‚ (2) and (3) are‚ by necessity‚ inherent to both franchise and license agreements‚ the determination as to whether or not your license agreement “crosses the line” into franchise territory‚ boils down to an evaluation of “control” and “fees”. That is:  

  • Will you possess significant control over your “licensee’s” methods of operation‚ or‚ in the alternative‚ are you obligated to provide significant support to your “licensee’s” operations? and
  • Will you receive or be owed a fee as a condition for your “licensee” to commence its operations?

If the answer to both of these questions is “yes” or “possibly yes”‚ your “licensee” may actually be a “franchisee” and you may be subject to franchise regulation. When making this evaluation‚ you must go beyond labels and consider both the substance of the relationship that your are creating and the long-term goals that you are attempting to achieve.

Related Articles:

By Charles Internicola December 5, 2014

Franchising Guides

The Ultimate Guide to Franchising Your Business

New to franchising? Do you want to learn more about franchising your business, where to start, the steps, and how to know if you are doing it right?

Learn More

Is Your Business Franchisable and Should You Franchise?

Franchising may be the next big step for your business and represents an opportunity to grow your brand. So, how do you know if franchising is right for you? How do you know if your business is franchisable and, if it is, whether or not you should franchise your business? To answer these questions you must evaluate whether or not your business is franchisable and, if it is, whether or not your individual goals and your business goals align with franchising and establishing a franchise organization responsible for on-boarding, training, and supporting franchisees.

Learn More

Licensing Vs. Franchising

When considering expanding a business both franchising and licensing are possible options. Each option however comes with different rules and regulations. Prior to moving forward with franchising a business or licensing a business it is important to understand the differences and how each may have an affect on you.

Franchise Lawyer Charles N. Internicola wrote “Licensing versus Franchising” for the very purpose of allowing successful business owners to understand the difference between licensing a business and franchising a business.

Learn More

Guide to Selecting a Franchise Lawyer

If you have questions about franchise lawyers, what they do, how they can help, the cost, and how to select the right franchise lawyer for you, then this guide will help.

Franchise lawyers advise and represent individuals and businesses on legal issues that involve franchising a business, preparing an FDD, filing and renewing FDD registrations, buying a franchise, and litigation involving the franchisor and franchisee relationship. The role of a franchise lawyer varies depending on whether he or she represents the franchisor or the franchisee.

Learn More

Item 19 Financial Performance Representations

Check out our guide where we discuss how to plan and properly disclose Financial Performance Representations in your FDD.

Learn More

Franchise Sales Compliance Guide

Are you a franchisor or a part of a franchise sales team? Do you want to learn more about franchise sale compliance and ensure that your sales practices comply with franchise laws and are consistent with best practices? Then this guide is for you.

In this guide you’ll learn the fundamentals of franchise sales compliance including the franchise laws, regulations, and best practices that your team should have in place for every franchise sale.

Learn More
Close Overlay

Let’s Talk

With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your business.

Fill out the following form and we’ll contact you as soon as possible. To reach our team directly, give us a call at (800) 976-4904.