Friday, May 29, 2015

Why a "franchise" instead of a license program?

Why don't more franchise lawyers recommend a licensing program instead of those pricey franchise programs? Why bother with all those franchise regulations, when we can avoid the hassle and cost with a simple license? Are the lawyers just in it to make money?

These questions are on the mind of every potential franchisor. I have written about licensing before - Let's Just Sell Licenses! But before you conclude that there is a "lawyer conspiracy," let me say that it is FOR YOUR OWN PROTECTION.

The issue confronting entrepreneurs who want to just "license" their concept is that it is very difficult under existing law to craft a program that avoids the legal definition of a "franchise" or "business opportunity." It can be done BUT any misstep can subject the start-up "licensor" to federal and state violations, forced rescission of deals, penalties, attorney fees and even criminal prosecution.

In short, by the time a lawyer reviews the FTC Rules (franchise and business opportunity), 15 state franchise laws and 26 state business opportunity laws, searching for the exact "license" program that will in theory skirt these 43 laws, you may as well comply with the franchise laws. And, by choosing compliance, you gain a form of insurance.

While space does not allow a full discussion of the benefits of franchise compliance, let me offer one example: Ohio (where I practice) has a business opportunity law. That law can be completely avoided via an exemption  if the seller "complies in all materially respects" with the FTC Rules - under the FTC franchise rule this means providing a Franchise Disclosure Document to potential buyers. This is a pretty nice insurance policy. A "licensing" program that meets the definition of Ohio's business opp law that has NOT provided a compliant disclosure document, will have NO insurance.

And, as we move outside of Ohio, more examples exist. If you want to review some of these laws, visit the Resources tab on my website.

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