FREE online courses on Franchising Business and You - Franchising Distinguished - Licenses

 

A license exists when the owner of a trademark, service mark or other intellectual property grants to a third party the right to use that trademark, service mark or other intellectual property for a particular purpose. All franchises are licenses because all franchisors grant franchisees the right to use their trademarks, or service marks to identify their businesses. Also franchisors usually license franchisees to use trade secrets and their business operating systems. Not all licenses are franchises.

 

A franchise involves a license to use trademarks in connection with the way a business is conducted. Thus the franchised trademark or service mark identifies the entire business of the franchisee, whereas other forms of licenses may pertain to the right to use trademark to identify a product. For example, Golden Bear Golf, Inc. may license a clothing manufacturer to manufacture tee shirts bearing the Jack Nicklaus name and logo. The licensor may prescribe the quality of the material used in the shirt, may set other standards for the product, restrict where it is distributed and it may charge the manufacturer license fees. However, in a standard trademark license arrangement, the manufacturer will not prescribe standards for how the manufacturer operates its business or give the licensee the right to use the licensed trademark in the conduct of his business.

 

Some companies use the term "licensing" even though what they are licensing is a franchise. Whether a business relationship is a franchise depends on whether each of the three elements described above is present, not on what the licensor calls the arrangement.

Distinguishing Franchise Opportunities:

 

"One Size Does Not Fit All"

 

What comes to mind when you think of a franchise?

 

A Cinnabon Bakery, a Fantastic Sams Hair Salon, a Liberty Tax preparation facility, a Super Coups direct mail advertising business, a Mail Boxes Etc. or a GNC store?  Or is it a Burger King restaurant, a Midas Muffler shop, a Coffee Beanery Store, a Ramada International Hotel, or a Thrifty Car Rental location?  In at least 70 industries, franchising has become a significant method of growing business by merging the entrepreneurial efforts and financial investments of independent business persons with franchising companies.

 

Can we generalize about franchising when franchises are as different as Candy Bouquet, Zaio.com, ProForma, Happy and Health Products or Furniture Medic, which enable someone to get into a franchised business for under $50,000 or as expensive as a Ruth's Chris Steakhouse, Crown Plaza or St. Regis hotels where investments could easily range from $1 million to $100 million when the real estate and buildings required are considered?

 

Some franchises require professional licenses or other special business experience, e.g. in real estate, optical, accounting and legal services franchises.  Many require investments in premium commercial real estate leases in shopping malls or at airport locations.  Some franchises require significant investment in inventory or capital equipment, while others principally offer services and require virtually no investment in inventory or real estate leases.  Although most franchisors seek active owner operators, believing that value is added to a franchised business by having the motivation and entrepreneurial efforts of owner operators, some franchisors, especially those committing high dollar investments, may offer franchise investments principally to investment groups or corporations whose owners may be called "passive investors."

 

Franchises offering passive investments may be offered in tandem with interests in corporations, partnerships, limited liability companies or other investment vehicles which require compliance with securities laws, as well as with franchise laws.

 

Compare the purchase of a $25,000 mobile carpet cleaning franchise where the buyer often doesn' t have a lawyer with a franchise requiring a $50 million investment in real estate and facilities in which lenders, investment bankers and financial institutions all are represented by sophisticated lawyers.  They both may be "franchises," but neither may fit your stereotypical image of a franchise.  And the differences between the businesses, the commitments and the "franchisees" are significant.

 

What's the message?  If you generalize or make assumptions about franchises, you are bound to make a mistake.  If the generalization causes one to miss an outstanding franchise investment opportunity, motivates one to buy the wrong franchise or prompts legislation to regulate stereotypical franchises, everybody loses.

 Many people believe that franchising usually involves a large franchisor company which uses long, one-sided franchise agreements to grant franchises to unsophisticated "mom and pop" franchisees.  That is sometimes true, but the author also has been involved in a transaction involving a franchisee's sale of hotel franchises to another franchisee for more than $2 billion.  Franchisees may be publicly traded and they may own or operate chains of franchised businesses themselves.  They may be people from all walks of life marshalling whatever assets they have to invest and the determination and business acumen in the dream of owning a business of their own.

 

Having disposed of the 'mom and pop' franchise myth, let's examine the concept of the large, multi-national franchisor which has the economic muscle to ride rough shod over the 'typical' franchise.  Fewer than 200 franchisors account for 1/2 of all franchised units and franchise chain sales.  The majority of franchisor companies have less than 200 establishments.  Because they frequently derive most of their income from fees paid by their franchisees, many franchisors generate less income and profits than their franchisees.  In reality, most franchisors--like their franchisees--are small or medium size businesses whose owners also are pursuing their entrepreneurial dreams.

 

So when considering a franchise investment, put aside stereotypes.  As you will readily see, franchising covers the spectrum of investments:  active and passive, large and small.