Licensing is one way people with ideas and businesses can scale their brands quickly. Licensing agreements are used by businesses for things like putting sports team logos on keychains, selling a certain line of dresses in a retail store, or operating a business under a certain brand name. In cases like this last example, however, it is important for licensees to be careful not to inadvertently create a franchise, as those are subject to very different laws and regulations.
In short, a license agreement grants rights to use a brand and associated intellectual property, while in a franchise, the franchisor offers business know-how and systems from the original business. In addition to offering complete business systems, a franchise is required to comply with and implement these systems, effectively duplicating the entire business. Both offer some level of support, but the extent of this support, as well as the requirement that training be implemented in the local franchise, is what separates a franchise from a license.
One of the biggest differences between a license agreement and a franchise agreement is operational control. A franchise generally comes with tight operational controls that concern how the business must be operated. A licensor, mean-while, is given little to no say in how the licensee operates the business. While they have some limited ability to control the business (for example, restricting the business from selling competing products or requiring a certain amount of marketing effort), they cannot provide detailed marketing assistance or control how the business is operated as a whole.
Licensors can offer some training and support, though this is generally limited to product knowledge and marketing support for specific licensed products. Franchisors offer extensive support and training for every aspect of the business as well as regular oversight to ensure operations comply with training. In many cases a licensor wants to provide additional training to help licensees succeed with the overall business, but this may push the relationship into the franchise model.
Generally, the fee structure for licensing is very different from franchising. Franchisees frequently pay an ongoing royalty fee on all income, while licensees either purchase branded merchandise for resale or apply a logo to merchandise they create; licensees may pay a smaller fee per item or contribute to a national marketing fund. These fees are governed by the agreement between the two parties, either the franchise agreement or the license agreement.
The difference between a license and a franchise can get confusing. Some companies, such as Disney, offer both options. They have both products they license, such as Disney princess merchandise, as well as franchised stores such as The Disney Store. Some of the key determinants of whether a business is a license or a franchise is the proportion of the merchandise in a store that is purchased from the licensor and whether the licensor and the licensee are in the same business. If a licensee purchases substantially all of its merchandise from the licensor, or if the licensor and licensee are in the same business, the chances are very good that it is a franchise.
If you’re interested in licensing your products and want to ensure you’re steering clear of franchise laws, contact the Chase Law Group, P.C. by calling (310) 545-7700. We can help you ensure you’re taking the right steps to get the best arrangement for your business goals. If you’re looking to expand through licensing or franchising, we will work with you to ensure you have the appropriate agreements in place and that you don’t stray into creating an inadvertent franchise if you are trying to license.