What is the Difference Between a Franchise and a License?
New business owners frequently use previously-established trademarks and business models because it provides a leg up in terms of market presence. Sometimes this may mean using a franchise, and other times it may mean licensing the relevant business product. So what is the difference between a franchise and a license, and why does it matter?
A franchise typically means that a franchisee (the person buying the franchise) buys a number of things – an established business model, intellectual property, and ongoing support – in exchange for paying a franchise fee and royalties to the franchisor (the person selling the franchise). It’s a turnkey business operation – advertising, business procedures, products and methods, and so on. Common examples of franchises are Dunkin Donuts, McDonald’s, 7-Eleven, Circle K gas stations, and Super 8 motels.
A license, in contrast, is more limited. The licensor sells the right to the licensee to use its brand name or trademark in exchange for payment. What is sold is much more limited than with a franchise. There is less control over how the licensee uses the license, and less, if any, training. Common licensors are Disney and the National Football League (NFL), which sell the right to use their characters and team trademarks for things like dolls and sportswear without telling licensees how exactly to do so.
Understanding the difference is key because different laws apply depending on whether the product is franchised or licensed. If you purchase a franchise, not only do you usually get much more support in how you run your business, there is also corresponding control by the franchisor in terms of how you have to run your business.
If you purchase a franchise, there also tends to be much more protection against overreaching by franchisors. The Federal Trade Commission requires that you receive 23 very specific disclosures about the franchise you are purchasing so that you can make an informed choice. After all, people often invest their life’s savings in buying a franchise – franchisees are in the same position relative to franchisors that consumers are in relative to large financial institutions. It’s only fair.
Whether you are interested in a franchise or a license, Fairview Law can help. We represent business owners at every stage of the lifecycle of a business. Give us a call at 980-999-3557, we're here to help.