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Licensing is Lower Cost and Can Be Done Quickly.
If you are thinking about expanding your operation through franchising, licensing may be an alternative because
(1) it is substantially less expensive, and
(2) it takes about ten to fifteen business days to complete rather than months and months for franchises. Also, no past audited financial records showing successful performance are required in licensing.
Business Goals Often Can Be Met.
It is often possible to draft a license agreement that achieves the goals of the licensor and does not violate the various franchising laws.
Existing Businesses as Potential Licensees.
Existing businesses often buy a license and add the product or service to that existing business; this allows the licensee to keep his “bread winner” business going while he tests the licensing operations and thus reduces the risk on the acquiring the license.
Much Less Work on Daily Basis.
The day-to-day business operation of a licensor is customarily much less work and complex than the business of being a franchisor. If you become a franchisor, you generally have to give up the operations of your own business and enter the full time business of being a “franchisor”.
Avoid Complex Government Regulation. There is little or no government regulation in licensing, and there is substantial and complex government regulation in franchising.
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Licensing More Effective in Difficult Economic Times.
In a time when America’s work force is being down sized, in many businesses the market for selling licenses is correspondingly expanding, because these displaced people need a way to replace their lost “living wages. Additionally, there are more qualified and desirable people available on the market to become licensees which makes business expansion quicker and more effective. In essence, the market for selling licenses in many businesses is actually expanding in difficult economic times. And when you add in the fact that licenses are often easier to get into because of a lower purchase price and quick set up, licensing is usually superior to franchising for the new licensee. Licensing is also superior to franchising for the Licensor because of the
(a) Quick set up, and
(b) The substantially lower cost in legal fees.
A QUICK OVERVIEW OF LICENSING
• Licensing is a business structure and method of expanding the distribution of goods and services. Rather than create a franchising business structure with the substantial costs involved, an entrepreneur who wishes to expand its business may be legally able to use a licensing legal structure. Usually a quick no-charge telephone conversation with experienced counsel can tell you if licensing will work in a particular situation. (Note: I do this several times a day
• As in franchising, in licensing there can be (i) an initial upfront fee, (ii) continuing royalties, (iii) monthly license fees during the term of the agreement, (iv) exclusive territories, and (v) long or short term agreements.
• In practical terms there are two types of franchises:
(a) Intentional franchises and
(b) Unintentional franchises
• The first type is the situation where someone wants to expand their business and decides to intentionally use the franchising mechanism to do it and comply with the registration laws.
• The second type is the predicament where in the effort to expand the business, franchises are inadvertently created (sometime called “hidden franchises”). These hidden franchises are often spawned from a poorly advised and drawn distribution agreement, license agreement, and other marketing formats. These are the franchises that get people into trouble!
• The problem is that both types of franchises have to be registered in the appropriate jurisdictions, and the consequences of failing to do so is often substantial civil penalties and/or criminal punishment. There have been many entrepreneurs that have served substantial prison terms for selling unregistered or improperly registered franchises.
• So this area of the law is nothing to “trifle with”, so to speak.
• If you go the licensing route sometimes in certain situations it is easy for a licensing format to slip into an unintentional franchising structure either by poor draftsmanship of the licensing documents and/or the inappropriate use of business applications in company operations. If a licensor slips into the franchise arena, he needs to either (a) immediately comply with franchise laws or (b) re-adjust the operations to comply with the licensing laws and avoid the franchise laws.
WHY DO FRANCHISE HAVE TO REGISTERED
• In general, the primary difference between a license and franchise situation is the amount of control that the franchisor or licensor exercises over its franchisees and licensees, respectably
• A franchise has to be registered, because the control by the franchisor over the franchisee is what is suppose to make the money for the franchisee; i.e. if you do what the franchisor says, then you will make money. Buying a franchise is like buying a security; i.e. the control over whether or not the buyer of the franchise or security makes money is in the hands of a third party; for the security situation it is in the control of the people who operate the company that issues the security, and for the franchise the control is in the franchisor who dictates how the franchise operates to make money
• Thus, the government requires disclosure of the risks to the potential franchisees just like the government requires a disclosure of the risks in buying a new stock issue. There are government requirements of registration of both franchises and securities for the same reason; i.e. to protect the public and give the public full disclosure of all risks before purchasing
DIFFERENCE BWTEEN FRANCHISING AND LICENSING
• Franchising and licensing as a means of expanding a business are often confused with one another. However, franchising and licensing come from two distinct areas of the law. Franchising is based on securities law and licensing is a form of contract law.
• What does this mean to the non-lawyer? It means that if one takes up franchising as a means of expanding a business, then compliance with the franchise laws, like the securities laws, requires registration of the franchise in the applicable jurisdictions. On the other hand, licensing is merely a contract between two independent contractors and franchise registration is not required.
• Here is the effect: It’s in the pocket book! Franchising creates more work for lawyers in complying with all the registration requirements, and consequently it is far more expensive to go the “franchising route” than down the licensing road which requires substantially less legal work.
• It is simple as that! If the factual situation is right for both formats, franchising is substantially more expensive than licensing!