Franchising vs Licensing: The Debate Continues

Well, every so often the debate on Franchising vs Licensing continues. Today, I noticed another discussion on LinkedIn about the subject so I’ve decided to post the responses on this site and look forward to all additional comments and insight.

Franchising vs Licensing (as posted on LinkedIn 12/5/09)

“I have a client with a service-based business that was exploring franchising. Upon further research, he has decided to set up licensing arrangements instead. Based on what he told me, it seems like licensing is a much simpler way to expand his business. I am looking for both advice and experience sharing. I would also like to know where I can view a sample/boilerplate licensing agreement. Thank you.”

Here are a few of the responses…

Response: “A franchise is of course a license and a license is a franchise if it meets the definition of a franchise.

If a licensor sets out to offer a license that 1) allows the licensee to use the licensor’s brand name, 2) charges fees or royalties greater than $500 in the first six months and 3) has significant control or assistance over the licensee’s business activities/operations/marketing then that license is a franchise.

The fact is that when all three legs of the franchise definition are met the license is a franchise. You can try to call a franchise a license if you want, but this would be a perilous and reckless path to take.

Additionally, you can search all manner of Franchise Disclosure Documents (FDDs) which contain franchise agreements [online at California Electronic Access to Securities & Franchise Information].”

To this response, the individual that originally posted the discussion responded: “I was told by multiple sources that there is a difference.”

Response: “You are correct there is a difference between a license and franchise, however it is not a choice. It is determined by definition.

In other words, if you are going to license [your company] to a licensee, charge them an upfront fee and an ongoing royalty and direct them to use your system of services/marketing/operations then the license is a franchise.

If your license is by definition a franchise and you choose to ignore this fact then you are running a huge risk and the consequences in financial terms will make franchise compliance look cheap in comparison.”

I chimed in with a recommendation: “I highly recommend you read [an informative report] about the differences between franchising and licensing [by Rochelle B. Spandorf].”

I am sure the debate will continue as more and more individuals look for the easy and cheap way out. The long and the short of it is, “If it looks like a pig, and it smells like a pig, and it tastes like a pig… then it is a pig!” And, let’s keep one thing in mind – ignorance is not a defense in a court of law!

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