If you ever wanted to open your own business or are a prospective franchisee, franchise opportunities may be the best move for you. Whether you have an established business, or another business arrangement, a franchise can often be the best option to expand their company into a new type of business.
A franchise license is a type of licensing agreement between two companies that allows one business access to the brand, logo, and resources from the other business. This relationship is characterized by the franchisee, the business looking to open a franchise, and the franchisor, the parent business the other company wants to work under.
The franchisor sells the rights to their brand to the licensee or franchisee. The rights include services, intellectual property, products, and even equipment. In exchange for all of these benefits, the franchisee will pay a fee to the franchisor for using their brand and any other support they receive
There are two major franchise agreements that can be made; the license to operate in the franchisor’s business format and the license to use a product or brand name. These agreements can have significant benefits and liabilities for both parties involved, especially if you get others to get in on the franchise investment.
Depending on the state you live in and the pre-negotiated contract made between the two businesses, a franchise can be a great way to expand or start a new business without having to worry about a lack of resources and support.
This business opportunity usually comes with an initial fee and a franchise registration that a startup company will need to overcome. Monetary payment, like royalties, fees, and trademark license, along with how the business is operated and how the license is used, are factors in determining how the franchisor or licensor is compensated.
One of the most iconic and well-known franchises today is McDonald‘s, where most of their restaurants are organized under a franchise system. Because of this, franchises like McDonald’s owners must use McDonald’s approved products, training, services, and equipment. While an excellent example of a licensing agreement would be Disney, which often licenses out Disney trademarks to lesser-known companies.
What is the Difference Between a Franchise and a License?
A franchise is a type of licensing agreement; however, not all licensing agreements are franchises. Most licensing agreements are characterized by a contract made between two businesses, but the content of that contract can often determine what kind of agreement was made. Whether you choose to sign for a licensing agreement or a franchise, every type of business model/license agreement has benefits and drawbacks.
A licensing agreement is a broad term that effectively gives a business the right to operate within or with a corporation or brand. An arrangement like this can be a great boon to your business, but it often comes with predetermined royalties and fees that can be unattractive for prospective business owners.
While some royalties and fees can be negotiated, they will generally be predetermined at a standard rate within a contract. The important thing to keep in mind with licensing agreements is that they are limited relationship contracts. The two businesses in the contract may operate within this license and typically last anywhere from 15 to 20 years.
Disclaimer; the franchise business has limited control over business operations. This degree of control that is lost can be another turn-off for potential franchisees.
State Licensing Regulations
Each franchise is subject to the various state laws determining franchising agreements. Still, they are regulated by the Federal Trade Commission, where they enforce franchise law using the franchise rule across the nation. Each state requires that a prospective franchisee is presented with the FDD or Franchise Disclosure Document along with the registered license with the state you are operating in. However, some states do not require any of these regulations. Below are the 13 states that require an FDD and a state registered franchise license.
These states require registered licenses with the state and an FDD:
- New York
- North Dakota
- Rhode Island
These states do not require an FDD:
- North Carolina
- South Carolina
- South Dakota
What are the Pros and Cons of a Franchise License?
Owning a franchise can be a great start to expanding a fledgling business or starting a new one from scratch, but they don’t come without liabilities. The best thing about a franchise is that most of the work is done for you in the sense that all the products, equipment, and services your business will perform and buy, are predetermined. A drawback of the franchise model is that the franchisee is also responsible for paying for training and expertise; however, the training they do offer is usually comprehensive. Franchise owners also have the added benefit of partaking in research and ongoing support with the franchisor.
This is because, in most franchise agreements, the franchisor will withhold a certain degree of autonomy over your business. While this may be great for new business owners, the lack of operational control can be a turn-off for many business owners. There is a trade-off to be made in a franchise agreement that every business owner should be aware of, such as your business’s name and the way you present to the public, which is all subject to scrutiny. This is to protect the franchisor’s right to determine how the brand is used or portrayed.
A franchise relationship differs from other licensing agreements in that most of the royalties and fees are paid upfront, so it is not a recurring expense. However, depending on the agreement, franchise owners may be liable to buy branded equipment from the franchisor.
How Long Does a Franchise License Last?
Running a franchise is rigid and limits business operations; however, franchises are one of the least binding licensing agreements available. Typically a franchise agreement is made for a five-year period, which serves as an initial commitment to the franchisor. This deal can be extended later if both parties wish to continue the franchise agreement.
While opening a franchise may not be for every small business owner, it remains an excellent option for anyone who wants a smooth and guided transition into owning a franchise. While being a franchise owner may not allow for the level of control desired, it remains a wonderful business model for those who want to become business owners but need support and resources from a more experienced company.