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Understanding Franchising versus Licensing

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Michelle DelMar, Esq.
 
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Understanding Franchising versus Licensing

  • What is the difference between Franchising and Licensing?

License.  A License is permission or the right to do an act which, without such permission, would be illegal. Licenses are governed by "contract law."  Franchise Registration is not required for a License, so long as it does not fall within the scope of applicable Franchise Laws.  A license typically is a less expensive means to achieve the goal, than Franchising.

Franchise.  A Franchise is similar to a License except that a Franchise (a) is regulated by the government; (b) is based upon the "securities laws"; and (c) must comply with "franchise laws."  Franchise laws of some jurisdictions require that the Franchise register with the proper authorities.  A Franchise arrangment is typically a more expensive means to achieve the goal, than Licensing.

  • How to determine whether to take the Licensing or the Franchise path.

If the business opportunity falls within the scope of the applicable Franchise Laws, the Franchise will be required to comply with such laws.  However, if the business opportunity does not fall within the scope of the applicable Franchise Laws and if the factual situation permits, the License route may be available to Licensor/Franchisor.  If the License route is available, a License will likely be less expensive and less complicated route than a Franchise.

In some situations and according to some State laws, use of the License model cannot be done without violating Franchise Laws and in those circumstances, use of the Franchise legal structure is necessary.  Thus, Licensor/Franchisor may be required to comply with Franchise Laws and may be required to register the Franchise Opportunity in certain jurisdictions, prior to solicitation.

One significant difference between a Franchise and a License is the control factor.  That is, the extent of control that the Franchisor/Licensor has over the Franchisee/Licensee is one determining factor.  In the Franchise situation, the Franchisor dictates how the Franchise operates to produce a profit and in this way, the control is held by the Franchisor.

Other factors that may put the business opportunity within the scope of the Franchise Laws, include, but may not be limited to, (a) fees paid by Franchisee to Franchisor; and (b) Franchisee's right to use Franchisor's trade name and/or trademark.

Other relevant laws that may be applicable to the business opportunity offered by Licensor/Franchisor, include, but are not limited to, "Business Opportunity Laws" and "Seller Assisted Marketing Plan laws."  If Licensor/Franchisor wants to offer a business opportunity in a State that has such law, Licensor/Franchisor may be able to (a) obtain a waiver of the law; (b) comply with the requirements; (c) avoid the factual situation that would make the business opportunity fall within these laws; or (d) a combination of the foregoing.

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