You may be interested in a specific business, whether it be its values, mode of operations, success stories, or otherwise. And with this, you may want to become a part of it. However, you may be unsure as to if you want to enter a franchise agreement or a licensing agreement. Of note, the two may have a different level of commitment. Continue reading to learn the difference between franchising and licensing and how one of the experienced franchise law attorneys at FortmanSpann, LLC can guide you on which option is best for you.
By definition, what does it mean to franchise a business?
Put simply, a franchise is a type of license that grants you (i.e., a prospective franchisee) access to a business owner’s (i.e., a franchisor’s) proprietary knowledge of a business’s processes and rights to a business’s trademarks, among other things. That said, the two types of franchise relationships that you may have with a franchisor are as follows:
- A business format franchise relationship: this is if you and a franchisor have an ongoing relationship in which the franchisor provides certain services to help operate your business (i.e., site selection, training programs, marketing plans, business equipment, business materials, etc).
- A product or trade name franchise relationship: this is if a franchisor holds the right to a name or trademark and sells it or licenses it to you.
In the end, a franchising agreement ultimately allows you to sell a business’s products or services under the business’s name.
How is franchising different from licensing?
Essentially, licensing is a less structured approach than franchising. This is because a franchisor will not, nor are they allowed to, guide you on your business’s systems and processes when using their license. Examples of limitations that a franchisor may experience with licensing are as follows:
- A franchisor may not control multi-unit expansion.
- A franchisor may not control capitalized expansion.
- A franchisor may not control managerial talent (i.e., cannot offer a vested equity interest).
- A franchisor may not control additional revenue sources (i.e., cannot collect royalties).
- A franchisor may not control scalability (i.e., cannot refine or customize to meet a wide variety of expansion plans).
And if a franchisor oversteps these boundaries in any way, then they may be subject to federal and state penalties. What’s more, you have the right to pursue legal action against them in circumstances such as these.
You must choose the path (i.e., a business that offers franchising versus licensing) that best works for you and your career goals. So take the initiative and reach out to one of the skilled franchise law attorneys at your earliest possible convenience. Our team at FortmanSpann, LLC will be happy to serve you.