Franchising and Licensing: Weighing the Pros and Cons of Each

If you are looking to start a business, you may be considering purchasing a franchise. But what’s the difference between going into a franchise, and simply purchasing a license to use someone else’s trademark, logo, or other information?

Pros and Cons of a Franchise

A franchise is a much more involved transaction than a licensing agreement. With a franchise, you are a separate business, but you are agreeing to operate your business in the same manner as the franchisor, following its policies, procedures, and business methodologies. Having a franchise can mean some loss of control – many of your business decisions are dictated by the franchisor, in the franchise agreements.

But in some ways, a franchise is an easier option, if not possibly a more expensive one than licensing. You are taught how to operate the business successfully, and you get the benefit of the public recognition of your business from Day 1. A franchise means you don’t have to “reinvent the wheel.”

From the franchisor’s standpoint, franchising allows you to control your business. Your supply information, provide territories, and tell your franchisees how they can and will operate their business.

Pros and Cons of Licensing

Licensing is much different, and whether it is better or worse than franchising depends on your perspective.

Let’s imagine that Subway lets you use its logo and its name to put on your sandwich shop. But beyond that, the sandwich shop was yours—you serve what you want, your employees wear whatever uniforms you want them to, and you can put out any advertisements you want to.

Outside of having to use the actual subway logo and colors that you licensed from Subway the right way, the entire business is yours.

From the franchisee’s standpoint, there is of course a lot more freedom when purchasing a license and not an entire franchise.

But on the other hand, there is much less guidance. Outside of making sure that you aren’t damaging its name and reputation, the licensor (Subway, in our example above) isn’t looking over your business, making sure that you are running it properly. And the licensee doesn’t get the benefit of Subway’s knowledge, systems, suppliers and other methods of doing business.

Long Term and Regulations

Long term considerations matter also. Generally, so long as you are profitable, following the rules, and the franchisor is making money, your franchise won’t be taken away from you. But a license is almost always revocable. Think of the licenses that Netflix had to use Marvel properties, licenses that were taken away when Disney opted to start Disney +.

Franchise laws are dictated by federal securities laws, and there are strict disclosure requirements that are required by the Securities and Exchange Commission. Licensing avoids many of these onerous federal requirements, but may not be as profitable as franchising your business in the end.

Call the West Palm Beach franchise law lawyers at Pike & Lustig can help you protect your business, and review your business agreements. Call us for legal guidance in your business decisions.

Resource:

dlr.sd.gov/securities/franchise_registration.aspx