A potential client called the other day and described a potential business venture to me. He said that he wanted to structure it as a license rather than “getting involved in all of the complications of franchising.”
As an aside, we have written on the topic of franchising vs. licensing previously.
Recently, the American Bar Association’s Forum on Franchising’s Listserv, which we have discussed before , featured a long chain of emails on the same subject, during which many opinions were offered as to what defines a license and a franchise, as well as the gray area between them, and whether those definitions can be manipulated to one’s benefit.
However, one writer offered the clearest bit of advice. He suggested that his esteemed colleagues, being lawyers, were focusing on the legalities of the situation to the exclusion of everything else, including good business sense. He proposed that the proper approach is to look at the business being contemplated and decide what is the best model for its expansion. Forget the law, don’t even talk to your lawyer unless he is able to not miss the forest for the trees. When that business model is clearly established, then apply the tests to determine whether or not it needs to be structured as a licensing arrangement or a franchise system.
More often than not, the situation will call for a franchise model. This is because the three prong tests that we have discussed before identify three elements that most successful business models will want to include. The three prong test identifies (i) a fee as a condition for entry into the business; (ii) the use of a trademark; and (iii) a marketing plan or system. It’s sometimes hard to imagine how to license a trademark, while properly protecting your rights by controlling its use, without qualifying oneself as a franchise.
But if the model calls for a franchise, we tell our clients not to look for a way around it but rather to embrace it. As franchise regulation evolves and the models become more refined, it continues to establish itself as an extremely efficient means of exponentially expanding the number of units of a particular business.