May 28, 2015
Every now and then I have a prospective franchisor that wants to consider licensing as an alternative to the formal franchising process. I understand their motives. At first glance, licensing looks like a faster, lower cost and less extensive process.
And in that sense, they are right.
But in reality, this is just cutting corners. And when you cut corners in legal matters or business, good things rarely follow. Licensing a business model relinquishes control over the brand and runs the risk of detrimental legal consequences.
Here are the formal definitions of each according to the legal dictionary:
The permission granted by competent authority to exercise a certain privilege that, without such authorization, would constitute an illegal act, a Trespass or a tort. The certificate or the document itself that confers permission to engage in otherwise proscribed conduct.
A privilege granted or sold, such as to use a name or to sell products or services. In its simplest terms, a franchise is a license from the owner of a trademark or Trade Name permitting another to sell a product or service under that name or mark. More broadly stated, a franchise has evolved into an elaborate agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion, and other advisory services.
The differences come down to the scope of the agreement and regulations.
As you can tell with the definitions, franchising is a much more comprehensive agreement. It is also becoming a much more regulated area.
So let’s break that down:
Licensing is under contract law. There are no formal requirements dictating elements that need to be covered in a contract. In addition, the government doesn’t regulate or require registration of contracts. It is just an agreement between two parties.
Within these agreements, you can see these elements:
The limitations of a licensing contract are:
If you overstep some of these constraints in a contract, you run the risk of being a de facto franchise. That comes with costly legal ramifications.
Franchising is governed by securities laws. Each state has different governances for franchises. There are registration, non-registration and filing states. While the type and extensiveness of oversight varies by state, every franchise is required to have a Franchise Disclosure Document.
This document requires 23 different disclosures including specific information and agreements from the franchisor. California, one of the more regulated states, has the ability to tell you to add or remove language from the FDD.
But, with these regulations comes control. As a franchisor, you have the ability to:
Licensing can be a powerful tool, but not for monetizing business models. The business owner just relinquishes too much control to maintain brand integrity. Licensing comes into play primarily for products and intellectual property.
The most common model is software.
The creator of the software grants the licensee rights to use their software. This is either through a one-time or reoccurring fee. The purchaser then installs and uses the software. The software creator has little to no control over how or where the licensee uses the product. The key to this equation is that the individual user doesn’t impact the value of your product. They are merely a user of the product, not a representation of the brand. In this sense, relinquishing control over the use of the product doesn’t have a negative impact for the brand name.
If you have a proven business model that you want to expand into an empire, franchise. While a more extensive and expensive process, the long term will pay out far beyond the licensing model. You will also keep the brand name worthy of an investment.
If you are looking to jump start the franchising process, check out my free workbook. This step-by-step guide will show you where you are in the process. It will also outline the next steps in the process.
As for the product developers, licensing is a valuable model. It gives you a viable method to monetize your intellectual property on a large scale. If you are looking into licensing a product, contact me today.