When it is time to expand your business, many choices in expansion are available. Two such types are franchising and licensing. How do you know which is more beneficial in meeting your goals? Following is a look at the advantages and disadvantages of franchising versus licensing. Remember, both have their strengths and weaknesses. It just depends on what your needs are and how you desire to achieve them. The main aspect to consider first in making your decision is the legal facet. Next would be the business phase.
What is a franchise? A franchise is a successful business organization that owns a product or service and agrees to work with like businesses that then make a payment to the one franchising out their business. Franchising is compared to the theory of a three-legged stool. Each leg represents an aspect associated to franchises. Leg one represents a fee of five hundred dollars. Leg two states that the franchisor holds the majority of control over the means of operation. The third leg states that the products being sold must be sold under the franchisor’s trademark.
Franchising is typically more expensive than licensing. But the differentiating factors in franchising versus licensing your business are the disclosure of statements and adherence to FTC and state regulations associated with franchises. Disclosure of information to someone purchasing the franchise encompasses the advertising, offering, sale, or other promotion of the franchise. Examples of items that need to be disclosed are the name of the person franchising out the business as well as any other names they may be known under, whether any civil or felonious actions were plead guilty to, settled or plead no contest to, if the franchise has filed for bankruptcy, and the conditions of the franchise contract.
Licensing is a faster and cheaper process to expand your business as opposed to franchising. This is due primarily to the fact that unlike franchising, licensing is not confined by stiff legal regulations of franchising. Because licensing a business is less costly, it is more desirable in times of economic difficulty. Unlike franchising, licensing is an arrangement as simple as a contractual agreement between two parties.
Once you’ve decided whether creating a franchise or license is better for you, you need to know how to go about doing it legally. In creating a license opportunity, the first step is to do away with one of the legs of the franchise stool. This should be selected based on the goals of your business. Those entering into a licensing agreement are known as independent contractors. One does not work for the other. Rather, the licensor explains the final goal of the license and the licensee agrees to work towards achieving those goals.
The choice between licensing or franchising your growing business treads on a fine line separated by predominately legal issues and regulations. In some cases, the licensor may find that he is either unable to avoid entering into a franchise or is better off by entering into one. Whatever you choose, be sure to keep your business goals in sight.
Sources
www.investorwords.com
www.townsend-law.netfirms.com
