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Franchise Vs Licensing a Business (Franchise Vs. License) and Business Opportunity Expansion Options

What is the difference between the franchise award licenses from a company? The starting point in the franchise licensing from a business case is to consider the legal aspects, commercial aspects. In reviewing the legal aspects, start with the premise that applies to both options. If you put someone in business (or allow them to use your company name / brand) this operation will normally be a regulated activity, subject to heavy fines for noncompliance.

This legal principle, coupled with the commercial aspects of the sale of a franchise from a license (see below) will meet most franchise over issues license. Advice from a competent franchise lawyer is essential.

BACKGROUND OF LAWS & BUSINESS OPPORTUNITY FRANCHISE
Why are the rules? The government, due to documented past abuses where tens of thousands of people lost all their net worth investing in business projects existent or worthless, has developed two principal mechanisms for consumer protection:

(1) Franchise disclosure laws for registration, and
(2) business opportunity laws.

The idea of these laws is to require that sellers to provide potential buyers with sufficient information pre-sales investment decisions in order to inform them may be made before the money changes hands, the long-term contracts are signed and major financial commitments are undertaken. Under federal regulations, disclosure concerning Franchise Document (FDD), covering twenty-three chapters and one hundred individual pages must be prepared and given to each buyer at least 14 calendar days before a contract is signed or money paid.

There is no question what are the terms used by parties in contracts or other documents to describe their relationship. For example, the contract may call the relationship a license, franchise, joint venture, independent contractors, etc., or the parties can form a limited partnership or a corporation. This is completely irrelevant in the eyes of governmental regulators, in particular the Enforcement Division of the Federal Trade Commission (FTC). Their goal is not about semantics, but if a small number of elements definition are present or not. Today, the area is subject to a complex set of regulations that differ from the federal level at the state level and differ widely from state to state.

Companies or individuals who say that the call for a "license" provides legal provisions are delusional and wrong for at least three reasons:

(1) common sense – if it has been easier than that, everyone would do it that way. The companies that are more than 3000 franchise are not stupid. Many of them can afford the best legal talent available. It's no coincidence they are all franchise and not a license;

(2) Even if the relationship is not regulated under the laws of franchising, business opportunity laws (see below) applies, and comply with these will be much more expensive than going the route of franchising, and

(3) Any analysis should include applicable federal and state laws.

All this reminds me of some financial planners who continue to advise clients to file U.S. income tax is not required under their interpretation of the Constitution of the United States. It simply does not work that way. In fact, it only works until the IRS catches. The "avoided the regulatory franchise spin (not surprisingly, is not accepted within the legal community) that only works until the company gets caught. The logic (not) like this: license follows contract law, franchise law is and therefore not entitled to the exemption will not apply. Sound like the "you do not have to file a tax return because the tax laws does not apply "argument.

Here's an example. A license "lawyer" has prepared a license agreement Dealer and ignored the requirements of the FTC franchise disclosure rules. Dealers became dissatisfied and hired a lawyer who has pursued litigation society, Not surprisingly, for the unlawful sale, franchises disguised. It cost the company $ 750,000 to go to trial federal court to answer the question "Is this a franchise contract? It is always a very expensive issue to answer. Try an end run around the laws on disclosure of franchise calling it a "license" can be a cheaper way to go first. But this is not a question of whether you will be taken, the only question is when. Be prepared to spend staggering sums on the road when the franchise disguised is being challenged for what it really is.

In a case of 2008, Otto Dental Supply, Inc. v. Kerr Corp., 2008 WL 410630 (ED Ark. 2/13/08) another franchise disguised cons a permit was in question. The licensor has claimed just sold a license, not a franchise and franchise laws do not apply not. He made a motion for Summary Judgement that the case be dismissed by the courts. The federal government is the district court ruled against the licensor and ordered the case forward. He said whether the license was really a franchise has risen to a jury to decide. Juries of common sense simple elements of definition of a franchise. They are not influenced by semantic arguments like "license follows the law of contracts, franchise law and therefore is not entitled to the exemption does not apply. "Another franchise expensive compared to learning lessons license.

This does not mean a business license is not a viable option in foreign currencies (excluding U.S.) operations where laws U.S. does not apply – but it is a very small minority. Most transactions and contracts cover activities and U.S. residents, so that the excess over the issue of license is an easy question to answer. Even within the United States there are some cases where calling the relationship a "license" is logical. A few years ago, a company selling franchises education professionals University called their license agreement. To comply with applicable laws, a document full franchise disclosure has been prepared and recorded. For marketing purposes strictly, the "franchise" has been called a licensing agreement in the franchise disclosure document.

List the definition of necessary elements is quite short, and if exemptions and exclusions franchise are available, the legal framework for franchise has been designed to classify these relationships is a franchise or business opportunity box. Normal licensing agreements contain certain "control" provisions (Right to audit, reporting, mandated suppliers, etc.) and the presence of any provision of supervision or assistance (Operations Manual, training, site or other assistance) is sufficient to satisfy these elements of the Rule. In fact, the title of the article FTC says it all: "Disclosure requirements and prohibitions concerning franchising and business opportunities Ventures. "So the focus should be on which box is better use, not on how to avoid using either box.

THE RELIEF OF THE BOX – BY REGULATION THE FEDERAL GOVERNMENT
Take the box franchise. Under FTC regulations that took effect in 1979 a thick document (now called franchise Backgrounder) must be prepared and distributed to potential buyers for a minimum of 14 calendar days before any money is paid or contracts are signed. This document now contains 23 articles and chapters of information, as well as current financial statements and copies of actual contracts used.

As mentioned previously, this document aims to give prospective buyers with sufficient information on the pre-sales business its financial situation, the proposed contract, investment requirements, trademark rights, exclusive territories, etc., to inform decisions can be made before the long-term contracts are signed. For companies who try to ignore the federal law, the FTC Act authorizes the Commission to recover civil penalties up to $ 10,000 for each violation of this rule, plus an injunction, consumer redress (obtaining Full refunds, terminate the contract), etc. Because each sale may result in multiple violations of different regulatory provisions, such fines can be substantial and far exceed the cost of doing it right the first time.

The disguised sale of a franchise (a franchise illegal) as a "license" may be the most expensive mistake a company makes ever. Just check the registration documents franchise from different states to see the large number of companies that fall into this trap. They started selling "licenses", operating under the misguided advice in a vain attempt to save money. Then they were prosecuted for selling a franchise unregistered or illegal. Or they finally get competent legal advice that what they are really disguised franchises sold, even if it was called "permit". Government agencies need to offer full rescission rights (Cancel the license, refund all money that has changed hands) to everyone they have sold "licenses" to. Defenses like "we did not sell a franchise, we sold License "or" it's a license and a permit arises under contract law, franchise law is not "does not work and have ever. Ultimately, they pay much more to be done the way it should have from the beginning. And for those franchise owners disguised who are accustomed to exercise their "Get out of this license agreement" the rights given to them by regulatory agencies, vendors eventually by placing them in the company for free in addition to having to repay all the money they paid. Not a pretty picture.

REGULATION STATE OF THE FRANCHISE
As the regulation of the franchise is at the federal and state levels, the effect of national legislation must also be considered. The FTC rule establishes minimum standards apply in all states, unless a particular state sets higher standards, then that state law applies. In 1971, eight years before the FTC rule became effective, the State of California was the first to adopt a franchise disclosure law for registration as a registration process is necessary before the franchise franchises can be offered (ie advertising) or sold. California Franchise Investment Law was in response to a wave of consumer franchise Complaints. Other states soon followed California's lead, leading to a situation where franchise companies had to follow different rules registration in each state franchise.

To overcome these difficulties and achieve a uniform, a group of Securities Commissioners different States adopted a regulation uniform franchise, starting in 1977, known as the Uniform Franchise Offering Circular (UFOC) format. All States franchise must be registered following the UFOC format, a thick document also containing 23 chapters of information. None of these states agreed to the was then known as document information from the FTC database. To ease the situation created by obvious UFOC vs. FTC format, the FTC allowed companies to use UFOC format as an alternative to the basic disclosure document. In 2007, the FTC adopted its own version of the UFOC format, known as Disclosure Document on the exemption or FDD. FDD format is the format required in all states beginning July 1, 2008.

SUMMARY BOX FRANCHISE
End line on the franchise area: In a single document preparation franchise disclosure (at a cost of about $ 30,000), a firm meets the federal requirement and is able to offer and sell franchises across the United States. Although specific information state and some information may be needed in the minority of states having a franchise registration process for review, This can usually be done in a couple of hours of overtime by the state.

THE BOX OPPORTUNITIES BUSINESS
Now consider the box business opportunity. At the state level, there are about 24 states to regulate and record business opportunities. Unlike the box franchise, there is no such thing as a communication format on the business prospects uniforms. business opportunity rules and registration requirements differ in each business opportunity. Many of these states also have a "time reflection, usually some days after the sale where buyers can change their mind for any reason and receive a full refund.

For a company that is the business opportunity route two different documents may need to be prepared and provided, the FTC Basic Information document (if unique business opportunity of the FTC definition of a business opportunity) and more short of a state document information on business opportunities. In addition, time limits may be observed: the FTC calendar day of 14 before, and whether a state business of the reflection period after.

The bottom line on the box business opportunity – if you are a lawyer with a business opportunity or "license" client, prepare yourself for hundreds of billable hours, you've just landed a big one. But if you are the business paying legal fees, there will be a lot less money to take the franchise route. Prepare one, Franchise Backgrounder, please register in a state or two expansion efforts begin, and you're done basically.

There are also other factors to consider Franchise vs. analysis of business opportunities, including liability issues (certainly more risk in the franchise arena), but these are beyond the scope of this article is not intended to offer legal advice. Companies should consult competent Counsel informed about the specifics of their particular circumstances before making any decision.

The Commercial aspects of FRANCHISING VS. BUSINESS PERMIT
The commercial aspects of the franchise vs. licensing opportunity and options business are relatively Simple. Everything comes down to the image of a marketing standpoint. From the perspective of credibility, your company does not want to defend every inch with People like McDonalds, Radio Shack, H & R Block and other franchised household names? These are the mental images formed in the mind when a consumer hears the word through franchising, and familiar, highly advertised slogans like "being in business for yourself but not by yourself," "a comprehensive training, "" support where and when you need it, "etc.

This, coupled with the complete set of training, starting and ongoing support services offered by the franchise companies, is a franchise of a product more attractive to the potential buyer and an easier for sale. The same goes for companies that sold the first "license" and then passed to the sale of "franchises". These companies indicated that they generated considerable interest and inquiries much when offering "franchises" compared to when they offered "licenses." So even from a business standpoint, the franchise licensing compared a business question is easily answered. In addition and as discussed above, a "license" is almost always a franchise in disguise, a ticking bomb creating significant legal issues if the FTC rule (and corresponding laws of the State of registration franchise) are not followed.

The commercial aspects of VS FRANCHISE. BUSINESS OPPORTUNITIES
Business business opportunity, compared to franchises, suffer from image problems that translate into defined marketing problems difficult. If you ever need a proof of this, just attend any business opportunity or to see the exhibition. You will see a series of fly-by-night opportunities such as worm breeding in backyards, exotic plants raised in glass bowls, condom vending machines (not a bad idea these days) and like all promoted by fast-talking, vendors at high pressure. Your company really want to be associated with these companies and the reputation they project? Poor image, coupled with the fact that business opportunity companies typically provide little training and no ongoing support in making a sale more difficult for potential buyers. In a business opportunity, the buyer is just thrown a ball, and it is entirely the way they run with it.

CONCLUSION
Both legal and business, the franchise vs. license choice is easy. Doing things right the first time to save money and major legal headaches down the road. People spread on the Internet that claim (via websites very professional consultant) that simply call the relationship a "license" are only the sale of a future trial. They are not looking through the lens of an expert with nearly three decades of experience who has seen firsthand the ravages of these "hidden" because franchises. Instead, they try to make easy money – at your expense one. From simple common sense perspective, if it looks like Duck, talks like a duck and walks like a duck -. . . it's a duck.

© 1990-2009, Kevin B. Murphy, BS, MBA, JD – All Rights Reserved.

About the Author

Known in the industry as Mr. Franchise, Kevin B. Murphy is an internationally-known franchise expert, San Francisco-based franchise attorney, author, and instructor. He hold degrees in Business Administration (B.S.B.A.) and Law (J.D.) from the University of San Francisco and a Master’s degree in Business Administration (M.B.A.) from San Francisco State University. For over two decades he has specialized exclusively in the franchise industry and owned a very successful franchise in the home improvement field. He has written over 40 publications, including four books on franchising and one book on trade secrets. Mr. Franchise instructs franchise company personnel in best franchise practices. He also teaches franchise law, licensing and intellectual property courses to attorneys as an approved MCLE Provider by the State Bar of California. He has drafted, reviewed and negotiated over 500 Franchise Disclosure Documents. Mr. Franchise is Director of Operations for Franchise Foundations a San Francisco-based professional law corporation.