Franchises Vs. Licenses: What is the best for you?
Many people are not aware that there is a difference between a licensee program and a franchise program. And the programs within each of these can be very different depending on the company.
Some of the more common differences include:
- Franchises are governed by securities laws and require a Franchise Disclosure Document (FDD). Licensee programs are governed by the law of contracts and are not required to provide information on all agreements that have been made.
- Franchises sell land rights to individuals to open locations under that brand or to sell to franchisees under that brand (usually referred to as Area Managers). Licensees are sold a territory, only the right to use the brand.
- Franchises maintain control over the franchisee and how they do business with the brand. Licensors do not have this control and only license the licensee to use the mark.
- Franchising requires state-by-state registration. Licensee programs are not required to register. (Registration can be very expensive and the franchisor must comply with all state-specific requirements.)
- Both franchise and licensee programs may charge up-front, administrative, or royalty fees (or all of the above).
Franchising may be right for you if/when:
- No Real Estate Experience. Some franchisors help you find a good retail location. They want you to be as successful as you are, so many go through extensive processes to research specific areas and locations to find something that suits them. should be a profitable location for you.
- No industry experience. Franchisors (generally…should) offer extensive and comprehensive training, including manuals and ongoing training, to franchisees on the industry, how to run the business, and how to maintain the business.
- No shopping experience. Franchisors generally have preferred (sometimes even mandatory) vendors that franchisees must use for construction, inventory, POS, alarms, etc. If you don’t have experience researching these companies, it’s nice to have someone do it for you.
- No pricing experience. If you don’t have experience with inventory pricing (or how to move inventory effectively), chances are the franchise already has everything you need.
The license may be right for you if/when:
- Have experience in the industry
- I don’t need a babysitter
- Know how to price your product
- Know how to move inventory, including orders.
- Have connections with companies that provide you with your inventory, construction, POS, etc.
I highly recommend talking to the franchisor or licensor in depth to discover some key elements that can help you make a decision on which way to go:
1. Pricing: Upfront, Monthly, Residuals/Royalty
2. Specific sales requirements: are there any?
3. Signage/construction requirements
4. What exactly will they help you with?
5. What exactly will they provide you?
6. What control will they have over you and your business?
7. How can you get out of the contract if you ever wanted to (ie term requirements)?
Admittedly, this is not an exhaustive list of questions, but it should help you get started. Find what’s right with you and taking your time making a decision is crucial to making the Correct decision. Good luck!
