Franchising vs. Licensing a Business: the Franchise vs. License dilemma

Posted almost 6 years ago. 6 helpful votes



Consider The Franchise Disclosure Laws

The starting point in the franchise vs. license question is it doesn't matter what terms are used by the parties in contracts or other documents to describe their relationship. For example, the contract may call the relationship a license, a distributorship, a joint venture, a dealership, independent contractors, etc., or the parties may form a limited partnership or a corporation. This is entirely irrelevant in the eyes of governmental regulators, in particular the Enforcement Division of Federal Trade Commission (FTC). Their focus is not on semantics, but whether a small number of defining elements are present or not. Today sellers are subject to a complex web of regulations that differ from the federal level (FTC Franchise Rule) to the state level and differ widely from state to state.


Consider The Business Opportunity Laws

The FTC Rule also covers "business opportunities," so the federal business opportunity elements must be considered. At the state level, there are approximately 24 states that regulate and register business opportunities. Unlike the franchise box, there is no such thing as a uniform business opportunity disclosure format. Business opportunity rules and registration requirements differ in each business opportunity state, so state-specific business opportunity disclosure documents must be drafted and registered in each state if the state's defining elements are present. For a company that's going the business opportunity route two different documents may need to be prepared and provided: the FTC's Basic Disclosure Document (if the business opportunity fits the FTC's definition of a business opportunity) and a state's more abbreviated business opportunity disclosure document.


Consider The Financial Cost When A "License" Relationship Is Challenged As A Disguised Franchise

It's not a question of "if" the franchise vs. license relationship is challenged, the only question is when. Here's a real life example. A "licensing attorney" prepared a dealer license agreement and ignored the FTC Franchise Rule disclosure requirements. The dealers became disgruntled and hired a litigation attorney who sued the company for selling illegal, disguised franchises. It cost the company $750,000 to go to trial in federal court to answer the question "Is this contract a franchise?" It's always a very expensive question to answer. Trying an end run around the franchise disclosure laws by calling it a "license" may be less expensive initially. But clients must be prepared to spend mind-boggling amounts down the road when the disguised franchise is challenged. And it's never a question of if it's challenged, the only question is when.

Additional Resources

Franchising vs. Licensing (full article)

Franchise Attorney

Franchise Expert

Franchise Foundations website

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