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Oregon Office:

Douglas D, Smith

PO Box 1034 

Sherwood, Oregon 97140-1034

Phone: (503) 840-0000

 

Utah Offices:

Bradley D. Smith

FranchiseSmith Utah, LLC

5508 West Kensington Circle

Highland, Utah 84003

Phone: (801) 615-1564

 

Douglas D. Smith

Franchise Smith, LLC

201 Red Pine Drive #4

Alpine, Utah 84004-5618

Phone: (503) 840-0000

 

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Licensing versus Franchising

April 10, 2012

Today, I read an article by a franchise attorney about the differences between "licensing" and "franchising." At first I thought "Oh, no, here we go again." I anticipated the typical "you don't need to franchise because you can just call it a license" scam. However, when I read the article I realized he was giving in simple lay language correct descriptions of state and federal franchise laws and alternatives to structure business deals to qualify for exemptions under those laws or to miss the definitional elements of the franchise laws and related regulations.

My experience has been that the majority of businesses thinking about licensing or franchising determine that the exemptions are too narrow and the ramifications of structuring to miss the definitional elements of a "franchise" are to problematic or ineffective to not go ahead and fully comply with the franchise laws and the related registration and disclosure requirements.

Contrary to the article which implied that franchising is extremely time consuming and costly, I have found that for most franchise programs the documents can be put together about as quickly as a licensing program and the opportunity can be ready to sell within a period of a few weeks in the non-registration states. (Depending upon the state, registration and exemption filings can take from a few days additional days to several months to finalize). And, while the cost of initially creating licensing documents and related legal compliance mechanisms can be significantly less that franchising, the total cost of franchising is not prohibitive (in the $10,000 to $50,000 range depending again upon which states are being considered). Whether franchising or licensing, I always advise my clients to stay close to home initially and for those licensing to use carefully drafted and comprehensive licensing agreements and documents and programs that can easily migrate to a franchise platform if and when appropriate in the future.

I always describe to my clients the number of counterbalanced advantages and disadvantages to going either way. About 10 to 20 percent of my clients license rather than franchise. However, I warn them that by definition licensing generally is more loosely structured and more susceptible to inconsistent results and often suffers from more varied consumer experiences than a well oiled franchise program.

Businesses that are "licensing" can fall into the common trap of eventually and inadvertently doing things, creating new charges or undertaking new programs that take them out of the licensing realm and into franchising without having complied with the state and federal franchise laws. For example, I had a client that structured it program to successfully avoid the "fee" definitional element of a franchise. After several years, a new vice president came on board and immediately "fixed the program" by charging several thousand dollars for the valuable week long introductory training course. That simple and logical mistake cost the company many times more than what the cost of complying with the state and federal franchise laws would have been. Today, that company fully franchises, charges significant up front and ongoing fees, fully controls the program, and it and its franchisees are much more profitable than when it limited itself to licensing.

In "licensing" there is the danger of creating a "bare trademark license" under state and federal trademark laws, that is, generally one has to control how a trademark (or service mark) is used in order to retain control and ownership of the mark. As a result the "name" and "control/assistance/marketing plan" legs of the franchise definition almost invariably are forced to come together both by legal principles and by the realities of the marketplace.

As such, I advise that no one should ever undertake a license or franchise program without expert ongoing legal advice. Beware that most attorneys are not expert in these matters. Many of the costly violations I have seen have been the result of a business following the advice of lay persons who were themselves violating the law but had not yet been caught or the advice of attorneys who were not aware of or who did not fully understand the relevant laws and program principles.




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