When establishing or growing your business, considering both franchising and licensing is important to determine what is best for your business. While franchising and licensing are both powerful strategies for expansion, they offer different models of operations and involvement.
Franchising: Building or Buying Into a Business Model
Franchising provides two avenues for business expansion. You can buy into a franchise by acquiring the rights to operate an already existing business model, or you can create a franchise by developing a successful business model and then selling the rights to others for them to replicate.
A franchise is essentially an extension of an existing brand or business to expand. It is an asset of your brand governed by federal securities law. The federal securities laws are relevant through the Federal Trade Commission’s (FTC) Franchise Rule, which requires franchisors to provide potential franchisees with a Franchise Disclosure Document (FDD) at least fourteen (14) days before they make any investment or sign any franchise agreements.
The FDD must contain twenty-three (23) specific disclosures about the franchisor, the franchisee system, and the franchise agreement with the purpose of ensuring franchisees have sufficient information to make informed decisions. While the FTC sets the minimum standard, states can have additional franchise laws and registration requirements, often referred to as “Little FTC Acts”. These states may require franchisors to register their franchise offering with the state and file their FDD before selling franchises within the state.
Franchisors must research the specific franchise laws of each state where they intend to offer franchises and comply with any additional registration and disclosure requirements. Franchisors must also comply with any additional regulation and disclosure requirements. It is important for franchisors to also comply with ongoing obligations of franchise relationships, such as providing support, training, rewards, terminations, and transfers.
Potential franchisees should carefully review the FDD to understand the risks and benefits of the franchise opportunity. It’s recommended that potential franchisees seek legal and financial advice to understand the franchise agreement and make informed decisions. Franchisees should also independently verify the franchisor’s claims by contacting existing franchisees and researching the franchisor’s reputation.
When you purchase a franchise, you pay fees for the right to operate a business, participate in a standard operating system, and use the brand name and proprietary information of the franchisor. You buy into an existing ecosystem that your specific franchise will be modeled after, providing you the foundation and creating an easier start up process.
When you buy into a franchise you have significantly less control over the business generally, but if you franchise your business, you will retain enormous power such as defining the business model, requirements, and territories.
Here’s a close look at aspects of franchising:
- Control: Franchisors have significant control over franchisees, dictating operational procedures, branding, and brand appearance.
- Support: Franchisors provide extensive training, marketing support, and ongoing guidance to franchisees.
- Fees and Royalties: Franchising typically involves an initial franchise fee and sales royalties.
- Business Model Replication: Franchising is about replicating a complete business model, including its systems, processes, and branding.
- Relationship: It creates a comprehensive, long-term partnership.
- Initial Cost: There is generally a higher buy-in cost for the franchisee because you are buying resources and the branding that already exists.
- Risk: Typically, there is lower risk for the franchisee because it is already an established and successful business model, but it will be higher for the franchisor in terms of brand recognition.
Business & Brand Licensing: Your Guide to Launching and Expanding
When starting any business, it is important to identify and obtain the necessary business licenses and permits. This is a complex and time-consuming process that, if mishandled, can delay your opening. You must identify all activities the business will undertake because different permits and licenses may be needed for each aspect. While these licenses and permits can be expensive, they are deductible business expenses, so retaining copies of all licenses and receipts will be beneficial later on.
Multiple government levels and agencies (federal, state, and local) have distinct requirements, making a top-down licensing approach essential. For instance, at the federal level, every corporation and LLC requires a federal EIN (Employer Identification Number), which is a nine-digit IRS number for tax identification. Navigating state, city, and county-level requirements can be particularly challenging due to varying and sometimes less-organized online resources. To avoid the headaches of numerous phone calls and online searches, businesses can work with compliance services, like CT, for assistance. Be aware that operating without necessary inspections and licenses can result in rapidly accumulating fines.
Once your business is fully operational and established, you can then consider licensing your intellectual property (IP) as a strategic business expansion tactic. This involves selling the rights to use your company’s products and trademarks in exchange for royalties, typically a percentage of the licensee’s sales. The licensor retains ownership of the goods or IP involved.
Calvin Klein is one of the best-known licensing examples. Most Calvin-Klien-branded garments, such as perfume and jeans, are produced through licensing agreements, not by the Calvin Klein company itself. Disney’s Consumer Products Branch is another well-known example, licensing movie images and characters like the Disney Princesses for a vast array of merchandise. Similarly, Warner Bros uses its IP, such as DC Comics and Harry Potter, in licensing agreements such as its theme part rights granted to Universal Studios.
Here’s an overview of the characteristics of IP licensing:
- Control: The licensor does not have extensive power over how the licensee runs its day-to-day operations. Their influence is mainly restricted to ensuring the licensee uses the licensed IP (like brand name, patent, or software) correctly and according to the contract terms.
- Support: Licensors offer minimal support, primarily related to the proper use of the licensed intellectual property. Licensees are usually responsible for their own operations, marketing, and training.
- Fees and Royalties: Licensing agreements usually involve royalties or fees based on product sales or usage.
- Business Model Replication: Licensing centers around granting rights to use specific IP, such as trademarks, patents, or software—but does not provide access to business models like franchising does.
- Relationship: The licensing relationship is more limited and potentially for a shorter term.
- Initial Cost: Generally lower for the licensee.
- Risk: Typically, lower for the licensor (as they retain IP ownership) but higher for the licensee (who bears more operational risk).
- Examples: Software licensing, trademark licensing, and licensing a character for merchandise.
Choosing Your Best Business Expansion Strategy
Franchising offers a complete business model for replication with extensive oversight and support, ideal for brand expansion demanding consistency. IP licensing, conversely, is more about leveraging specific IP rights for broader market penetration with less operational control. Both strategies provide powerful avenues for growth, but choosing the right one depends entirely on your business goals, desired level of involvement, and risk tolerance.
If you would like to learn more about the legal implications of licensing or franchising your company in Florida, do not hesitate to contact one of our experienced business attorneys at EPGD Business Law. With offices in Miami, Florida, we are ready to assist you. Call us at (786) 837-6787 or email us to schedule a consultation.
