Many prospective business owners experience a bit of confusion regarding the differences between franchising and licensing agreements. In the simplest terms, licensing allows entrepreneurs to use technologies or trademarks developed by a business partner. A franchise agreement is a long-term relationship in which entrepreneurs must operate under the guidelines established by a franchisor.
Business people mulling a decision between licensing and franchising should make sure they understand the business law aspects included with both options.
Licensing
The “licensor” in a licensing agreement grants permission for a “licensee” to use a trademarked property for a specific purpose. An example would be the use of a trademarked character to market the merchandise of a licensee. A real-life example of a licensing agreement involving technology is the agreement between Microsoft and the individual users of the company’s Windows operating system.
Franchises
Franchisors grant permission for franchisees to duplicate a successful business model. The agreement specifies the products sold and day-to-day operations. Some franchise agreements include the uniforms or clothing worn by employees. Three elements are necessary for a franchise relationship to exist:
- A measurable degree of control – Franchisors exercise a degree of control over the franchise and decide what can and cannot be sold by a franchisee. Franchisees are not afforded room to deviate from these policies.
- Trademark license – Franchisees use the name and trademark of the business created by the franchisor.
- Franchise fees – Franchisees pay an upfront fee to own a franchise. This payment can include fees with other names attached to them.
Business laws and regulations are sometimes complex issues that can be difficult for individuals without experience. Individuals with questions regarding the structuring of a business or other related topics may benefit from speaking with a lawyer before they act.
