Everyone knows the Big Macs at McDonald’s restaurants taste pretty much the same. Why? Because the franchise agreement tells the operator exactly how to cook the burgers and when to clean the grill. The franchising corporation controls what the operator does daily.
Now maybe you’re wondering whether to buy a franchise like McDonald’s, but you’ve also heard about licensing a business. What’s the difference?
Franchising. A franchise agreement gives you the right to carry out specified commercial activities in exchange for fees. The relationship is regulated by the Federal Trade Commission (FTC), which seeks to stop fraud and misrepresentation by requiring the franchising company to provide an accurate report on prospective sales and key factors in the company’s Franchise Disclosure Document. The laws governing franchising companies are complex and set up to protect the public, and many states also have regulations. That doesn’t mean all franchise promises are true or current, so it’s best to have a business attorney knowledgeable in franchise law take a look before you sign the agreement for fee payments.
To start your search, check out the FTC’s Franchise Compliance Guide and review available franchises from ATMs to Zumba via the International Franchise Association.
Once you narrow your focus, then visit some franchise locations to talk with franchisees. Do the franchisees feel supported by the franchising corporation, or were they dropped off a cliff to do their own marketing? Ask about how long you should expect to go without income until you generate enough money to pay expenses and fees, which may be steep.
Once you get the company’s Franchise Disclosure Document, make sure to go over the business management and operational rules and read the fine print. You may be required to remodel in the future or use the franchising company’s vendors, which could be costly if pricing goes up. Have your business attorney negotiate any items that seem excessive, and spend the time and money going over the details before problems develop. Be prepared to do whatever is in the documents. You may not like scouring the grill every night after closing, but you won’t have a choice once you sign the papers.
Licensing. If you hate the idea of giving up day-to-day control of your business, then you may prefer a licensing agreement – but be careful. Some licensing relationships should really fall under the franchising rules. Here’s an example of a proper licensing arrangement: Perhaps you have a novel way to use anime images, such as imbedding them on light switches. When you license the images, the anime company does not control your manufacturing process, and that means you have a real license, not a franchise.
Make sure your licensing relationship is really that. Watch out for terms such as mandated suppliers, the right to inspect, designated territories, required method of operations, training, operations manuals, common name, or cooperative marketing. These items may mean your license is really a franchise agreement.
Licensing falls under contract law and the terms you agree to will be in the license, so have a business attorney review your agreement before signing. It could be a serious error on your part to sign a licensing agreement without an experienced attorney on your side.
Deceptive business opportunities. While you’re looking for a franchising or licensing arrangement, keep an eye out for deceptive business opportunities. If you’ve ever seen ads for a Mystery Shopper business or Home Credit Card Terminal, then you may have come across a deceptive business opportunity made to sound like a legitimate venture. The FTC has gone after some of these bad actors, but others still troll for folks who can’t afford a proper franchise or licensing agreement. You can check out some bad boys on the FTC website.
A bit research on your part will help find the best franchise or licensing agreement to match your skills and interest. Here’s to your future business!
