Like most professions, law is filled with a specialized language not generally used by the public. What I’ve heard in my career is that although business people have a grasp on what they want to accomplish, the don’t necessarily know the jargon to get themselves there. Franchise, license or “partnership” (in the generic sense) is one of those subjects where specificity of language and intention at the outset can save money and trouble down the road.
So what is the difference between a franchise, a license, and a business partnership?
Franchise means control. And lots of it.
A “franchise” means a business relationship where the “franchisor” (the mother-ship) tells the “franchisee” (the small, local business owner) exactly how to advertise, market and sell the product. The Mother-Ship has determined how it wants its product sold, including such specificities as logo, uniformity of appearance, taste, touch, smell, seating, customer experience (everything the customer sees, hears, smells), colors, cleanliness, which products are used or not used. Another way to think of it is that the franchisor controls uniformity of everything. Think, Subway, McDonalds, gas stations, many hotels. The franchisee buys the right to present the full customer experience to the public in a local setting. A violation of the franchise standards may result in fines or termination of the agreement.
“License” means permission. The rest is up to you.
A “license” generally means the licensee (again, the local business person) has been given the right to sell or use something that belongs to another, called the “licensor”. How that is done is generally left up to the business person (within reasonable limits), although the licensee can set limits on how it is used, or set uniformity specifications. Obvious licenses you have seen are given by sports franchises. For example, Notre Dame University will allow a hat manufacturer to put the “ND” logo onto a hat. How the hat is designed, manufactured, distributed, priced, sold, however, is up to the licensee. Notre Dame will set limits on the display of its logo. For example, it may set the colors to be used by the licensee, or it may set allowable color variations. Notre Dame takes its fee from the use of the license, not from any revenue.
Another type of license is a software license. Those apps you download for your phone are likely licensed to you – you don’t own the source code, just the right to use it. That means you can’t turn around and sell the code to someone else, or use it in your own product (without permission – another topic).
A “partnership” is two entrepreneurs getting along.
The third type of business relationship one may encounter is generically referred to as a partnership. Informally, it’s two or more business people or businesses working together, hopefully with a written set of conduct rules between them. If a business person owns a burrito shop and wants to open one across town but doesn’t want to have to ride herd over it, a partnership of some sort may be the best solution. Setting up a franchise can cost tens of thousands of dollars to establish, far too costly for a small business. However, if the local burrito shop can find a “partner” who is interested in owning/operating the same business, this is the way to go. The original owner and the business partner work together to make the new location work as well as the original, but without the cost of a franchise, or the loose or non-existent standards surrounding a license.
The cost of setting up or purchasing a franchise, license, or partnership can vary greatly. However, the cost of getting it wrong or doing it oneself can be even more costly. North Carolina does not have a special franchise law; Illinois does. There is a patchwork of franchise laws across the country, both state and Federal. Violations could result in substantial fines. Often franchises will be disguised (or found to be) de facto franchises. It can turn quickly into a mess for all involved.
Can I do that?
Any business can set up a franchise, license a product, or enter into a partnership. One should call an experienced business attorney such as myself in order to discuss which legal relationship is best for one’s business.