How Will You Grow? Licensing v. Franchising

Dec 28, 2019 | Best Protection Practices, Expanding Your Business, Trademarks

So you want to expand your business? You want the checks to come in based on a source of income other than your own long hours? How do you do this? There are a myriad ways to expand. Among those ways are licensing and franchising.

What is licensing? What is franchising?

Licensing involves a contract between your company and another company in which your company grants the other company the right to use your product or intellectual property in exchange for the payment of royalties and/or annual fees. Franchising involves the use of the name of your company, payment of initial fees, monthly fees and/or royalties, and control over the franchised business through operation manuals and/or business assistance.

The nature of each business’s products and/or services usually will dictate whether licensing, franchising, or some other arrangement will work best. You should consult an attorney to determine which arrangement fits your particular business.

The choice between licensing & franchising should be made wisely…

However, if licensing and franchising both appear to be suitable for your business model, beware the choice of a licensing arrangement. If the licensing agreement is not done correctly or if it is the wrong choice between the two, you could implicate franchising law.

If you are subject to franchise law but have not followed the rules and regulations for reporting and disclosure, the Federal Trade Commission (“FTC”) and/or an equivalent state agency can file a lawsuit against your company and/or you individually with the possibility of fines of $11,000 for each violation and the freezing of corporate and/or personal assets. Therefore, the decision between franchising and licensing should not be taken lightly and should always be made with the advice of an attorney.

What are the benefits and drawbacks of licensing vs. franchising?

The benefits of licensing a product include minimal up front costs and little time investment. However, when you license a product or your intellectual property, you relinquish some control over it and the financial rewards may not be as large as other types of expansion.

Conversely, franchising allows you a significant amount of control over the manner in which your goods and/or services are sold and the financial rewards potentially can be substantial. But, the time and financial investments are more burdensome than a licensing arrangement. Because the FTC requires extensive disclosure by the franchisor and heavily regulates the franchising industry, much money and time is spent having an attorney set up and oversee the franchise.

Whatever your business and whatever your choice for expansion, consult an attorney first so that you provide your company with a solid legal foundation before your growth. The Strain Law Firm specializes in franchising and licensing legal services. Call us at 912-963-1776 to find out more.