Franchising is one of the most popular business formats today. Popular name brands such as McDonalds and Subway are international franchise name brands. All franchise agreements are licensing agreements but not all licensing agreements are franchises. The Federal Trade Commission (FTC) has outlined franchise rules and regulations in the United States.
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Grant of License
Both franchise agreements and licensing agreements have one main commonality: they both grant a license from one party to another. The grant of license typically involves a core product, service, technique, method, or name brand.
Royalties and Fees
One of the three distinguishing characteristics that makes a license a franchise is the payment of royalties by the franchisee to the franchiser. Any license requiring a licensee to pay royalties of £325 or more in six months is typically considered a franchise.
If the licenser provides the licensee with substantial operating instructions and manuals then the license is typically considered a franchise; this is the second component of franchising.
Use of Trademarks and Name Brand
The final component of defining a franchise is the use of trademarks and name brands. If a licensee is allowed to use the name brand and trademarked logo, then the licensee is also a franchisee.
For a licensee to be legally considered a franchise by the FTC it needs to meet most of the three requirements regarding royalties, operating procedures, and trademarks.
All of the decisions made around licensing vs. franchising is dependent upon the facts and circumstances of the licensing agreement. A qualified franchise or business attorney should always be consulted when reviewing licensing or franchising documents.
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