TO LICENSE OR FRANCHISE . . . THAT IS THE QUESTION.
Understanding the Differences between Licensing and Franchising . . . that is the challenge.
If it looks like a duck, walks like a duck, quacks like a duck, it’s a duck. Similarly, if a deal is structured like a franchise and/or operates like a franchise, it’s likely a “franchise,” and if so, franchise laws must be complied with, regardless of what you call the deal (i.e., even if you choose to call it a “license,” not a “franchise”). Misrepresenting the deal, misunderstanding the deal and failure to comply with necessary laws, could result in civil and criminal penalties for persons and businesses involved.
Distinguishing between a license and a franchise can be very confusing; until you realize that a franchise, is a deal that involves a license and falls within the scope of franchise laws (the “Franchise Box”). Generally, a “license” is a right to use or do something. A franchise is a deal that (a) involves a right to use or do something (a license), and (b) involves elements that puts the deal into the Franchise Box. In other words, the details of a licensing deal and/or provisions of a licensing agreement are considered in determining whether or not the licensing deal falls within the Franchise Box.
Why is not obvious, whether or not a deal is a franchise or simply a license?
The determination of whether a licensing agreement deal is a franchise or simply a license, is rarely obvious to most business persons, because many combinations of legal factors and elements of the deal are considered in aggregate (taken together) to make the determination. Some important factors considered include,
(a) the type of rights that are given as part of the deal (the licensing agreement, etc.). For example, the right to use a business trademark, proprietary business systems, secret recipes, an intellectual property license, etc.;
(b) the specific conditions or promises that are part of the deal (training, manuals, fees, etc.); and
(c) the level and type of control that the business giving the rights, will have over (i) its property while it is being used by the receiving business; and (ii) the operations of the business receiving the rights.
To Franchise or License . . . Making Cents of it all.
Why do so many small business owners want to stay away from franchising?
Typically, small businesses believe that they do not have, or they do not want to spend, the resources that are necessary for compliance with the applicable regulations, including time, effort and money.
On the other hand, why do some small business owners want to franchise, despite the additional commitment of resources required?
(a) These small business owners may be betting that revenue received as a result of the franchise deal, will well exceed the additional resources required for compliance with the applicable laws.
(b) They may be betting that the deal will build and expand their brand, increase the value of their property that is related to the deal and that such outweighs the costs.
(c) They may believe that maintaining control over their brand and property is important.
Unfortunately, for small business owners that want to offer a deal involving the receipt of payment in exchange for providing others with a right to use their property (such as a trademark, business name, proprietary business system and/or trade secrets, such as formulas, processes, methodologies, recipes, etc.), staying outside of the Franchise Box is not likely. Therefore, compliance is typically necessary to avoid significant civil and criminal penalties.
In sum, if a deal that includes licensing rights, is not properly registered, and it is not known whether the deal is “exempt” from registration (and other compliance requirements), the deal may be “illegal.” If the deal is illegal, civil and/or criminal penalties could apply to the persons and businesses involved.
Understanding the differences between licensing and franchising is challenging. Seek the advice of a qualified licensing lawyer / franchise lawyer, experienced and knowledgeable with regard to the differences between licensing and franchising, about your licensing agreement, before soliciting others with regard to deals involving licensing.
Michelle L. Grenier, Esq.,
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Copyright (c) 2011-2012 Michelle L. Grenier, Esq. All rights reserved.
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