Franchise, Distributor, or License?
Experienced California and Orange County Franchise Lawyer
I am often asked the difference between a Franchise business model, a Distribution model, and a Licensor/Licensee relationship. Business owners may be under the mistaken belief that if they do not call their arrangement a franchise, then it isn’t one. They mistakenly believe that by calling the contract a License Agreement or Distribution Agreement, they will not need to follow the extensive franchise law disclosure requirements or the California franchise registration requirements. It is critical that businesses understand the legal definition of a franchise, so as not to inadvertently become a franchise.
In California, and for the most part across the US, a franchise legally exists by the presence of three specific elements:
- You Grant Another Business The Right to Use Your Trademark or Business Name in their business;
- You Require the Other Business to Operate in Accordance with A Marketing Plan and/or Operations System;
- You Charge a Fee to the Other Business, for the above two items, whether ongoing or upfront, or delayed.
Many businesses that want to utilize this type of expansion platform want to avoid the California franchise disclosure laws and registration requirements of franchising by calling their business a distributorship, or a license agreement. This simply won’t work. If a business model involves you letting another party use your business trademark or name, and directs or requires them to following your operating or marketing system, requires they pay you some sort of payment, then the business model will be a franchise, and you are subject to the California franchise disclosure and California registration laws.
I’m Not in California, How Can You Help Me?
Even if you are not located in California there are many ways I can still be of service to you. For example, if you are considering franchising I can advise you on your state’s requirements. I have experience registering new franchises in all states that require registration. If your state is not one of the 14 to 17 states (some are filing states…) with their own registration process, you will still need a Franchise Disclosure Document (FDD) that complies with the FTC rule. I can absolutely help you. My clients appreciate my 25+ years experience, that I get to the heart of an issue quickly in a cost effective manner.
How can expand my business and legally NOT be a franchise?
Just take away one of the 3 specific elements:
Let’s say you let someone use your business name in their business and they pay you a fee for that, but you do not require they operate their business pursuant to any sort of marketing or operational plan. That is NOT a franchise. Common examples are licenses of a trademarks to different product manufacturers. This is a straight trademark license, without any required marketing or operational plan on how the licensee/manufacture will operate its business.
Let’s say you let someone use your name and give them an operating or marketing plan to follow, but you do not charge a fee. This is NOT a franchise. Common examples of this are the Multi Level Marketing Businesses, whereby you get to use the Company name, sell the company products, but you do not pay a fee for that privilege; instead they pay YOU commissions on each sale. Other examples are royalty free licenses to use a name in a certain marketing manner.
Let’s say you sell an operational or marketing plan for a fee, but do not allow the buyer to use your business name. This is NOT a franchise. Common examples are the “guru” types of businesses that sell you “HOW TO” business plans or marketing plans, which they replicate to the general public, but the public can not use ther GURU’s company name on their own business name.
The above 3 business models will allow a business owner to expand without inadvertently becoming a “Franchise”. Let’s look at some other ways to avoid becoming a Franchise, through a True Distributorship or True License.
Distributor Agreements in California
A true distributor agreement is where the distributor is authorized to buy and sell a manufacturer’s products; the distributor buys inventory at one price and sells it at a higher (wholesale) price to retailers, who then resell the products to the general public at a retail price. Distributor Agreements may also be direct from the Manufacturer to the retailer. In these cases, the products/services are actually being bought and sold, so these are in reality, simply inventory purchase agreements with a license to sell the Trademark products/services. This is NOT a franchise arrangement.
Generally, a license is any agreement where by an owner of some property or rights to some property, allows another person/business to use, utilize, advertise, sell, sublicense, market, or even talk about, the property or property rights. Tangible examples are products, names, trademarks, logos, patents, copyrights, business systems, books, pictures, media, music, software, other licenses…the list goes on and on. Anything you can own as a piece of property, or have rights to, can be licensed. Think of it as “renting” this property; it is called a license because in general, the property being licensed is more often of an intellectual nature rather than a hard piece of equipment, which you would rent. Intellectual property (IP) covers many intangible property rights which can be licensed. If you license property or property rights for a fee and do NOT mandate how the property is marketed or sold, you will avoid falling into the definition if a franchise.
Contact an Experienced Franchise, Distributorship and Licensing Lawyer Serving Orange County and All of California
If you try to operate a “franchise” business as a distributorship or licensed relationship you are opening yourself up for all sorts of legal and financial liabilities. You are working so hard to develop your business and increase profitability and scale. Protect your original business ideas and processes and hard earned money. Contact an experienced California franchise, distribution and licensing attorney who has real life experience working with individual entrepreneurs and national franchisors. Contact Janet Martin today for a free initial consultation at 949-415-2677 or contact me to schedule an appointment.