Franchising vs. Licensing
Licensing is an expansion vehicle that is best used for a "process," or a straight business opportunity. Someone might license a certain manufacturing process that they have developed, and receive a fee each time it is used, for example. A business might license a person or another business to sell their product, without significant control over the business.
Franchising exists when someone: 1) uses the name of an existing business, 2) pays $500 or more to the existing business, and 3) operates in a manner somewhat as prescribed by the existing business, providing assistance, or maintaining control. Thus, name, payment, and assistance or control determine when a franchise exists.
So, one or more of those has to be eliminated to avoid being subject to franchise requirements, and normally it is either "name" or "control." However, many people who think that they are expanding by licensing can quickly and inadvertently develop a franchise program without realizing it. Many of those who start expanding by licensing soon discover that they really want more control over the business operation of the licensee, and that franchising would be a better expansion vehicle. Additionally, many of those who opt for licensing eventually find out out that they they have run afoul of state business opportunity laws.
Franchising is more costly, and takes longer, than simply putting together a licensing agreement. However, rather than thinking: "I want to expand. How can I do it and avoid franchising?", we recommend that business owners carefully consider the legal position and market acceptance of franchising. We think that unless you are licensing something like a manufacturing process, franchising can provide a much greater payoff, and higher level of satisfaction (and a better exit strategy) than licensing.
Franchising does not have to be difficult, nor does it have to be costly. We believe that it is a very good way for a successful business to expand regionally and nationally.