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Not every business can and should be a franchise. As the founder and operator of an exciting new concept, it’s hard not to imagine opening a location on every corner and becoming the next franchise millionaire. It’s a common dream. Numerous concepts once claimed to be the next “McDonald’s” in their industry.
And while franchising may be the right growth vehicle for someone who has an established brand and proven concept that is ripe for growth, business owners who want to expand their concept into prime locations ahead of the competition but don’t want to do so have other options Available to do it alone for several reasons. For example, they may not have the resources or cash reserves to finance a franchise program (it is important to note that while franchising a business leverages the time and capital of others to open additional units, establishing a franchise system is certainly not a no). costs). Or they don’t want the responsibility and relationships that come with being a franchisor and would rather focus on running their core business rather than a franchise system.
Related: The Pros and Cons of Franchising Your Business
But when you have eager customers asking to open a branded location like yours in their neighborhood, it’s hard to resist. You may be thinking: What if I don’t take the deal and miss an opportunity that may never come around again?
Licensing your intellectual property, such as your name, trademarks and trade presence, for a set fee or a percentage of sales is one way to achieve this without having to go the slightly more laborious and legally controlled franchise route. Types of licensing agreements range from granting a license that allows another company to manufacture or manufacture your products to allowing someone to use your logo and name for their own company. Unlike a franchise, in a licensing situation your partner only receives certain, predetermined rights to sell your products and services, rather than a blanket agreement that gives them a turnkey business, accompanied by training and support, for set fees. A license agreement sets out the rights and obligations of each party and what they will and will not do under the terms of the agreement. It is critical to have an attorney prepare the paperwork and consult a trusted business advisor who has helped others along this journey and can shorten your learning curve while protecting your rights. License agreements are governed by contract law and not franchise laws. However, caution is advised: To ensure you stay on the right track and don’t stray into franchise territory, you’ll want your advisors to explain to you exactly what you can and can’t do as a licensor.
For example, a license agreement excludes you from involvement in the day-to-day operations of the licensee. While it may sound like a relief to have no control, it can be a double-edged sword, especially for people who are used to controlling all aspects of their products or services. You don’t have to provide licensees with ongoing services like marketing materials and ongoing training, but that also means you have no control over how they run their business, what their product mix is, or how they decorate their space. If you are Type A, this might be difficult for you.
Most people are more familiar with third-party brand licensing because these arrangements are common in the sports and entertainment industries, where a celebrity lends their name to endorse a product, be it branded sportswear or trendy foodservice products like pizza or chicken , or even ice cream.
Using a celebrity’s cache attracts media attention you might never get otherwise. But not everyone who creates a great concept or product has the recognition that would allow them to attract famous business partners or endorsements and raving fans to follow them.
There are other methods to get your products in front of more consumers. Some coffee concepts, such as Caribou, have created market saturation by franchising traditional stores as well as licensing for non-traditional locations such as airports, big box stores and college campuses. However, others, like Starbucks, use a combination of company-owned stores and licensees in busy locations where a small kiosk can serve a high volume of customers. And of course, bags and pods of these brands’ coffee blends are also sold in retail stores, for example in grocery stores.
Related: Startups need to protect their brand. Here’s how and why
But here’s that cautionary note again: If you decide to license your products or services, be careful not to try to control the way licensees operate their business, from choosing locations to training them Employees.
While licensing or franchising can be a suitable business growth tool for many brands, other business structures can be considered:
- Company-owned branches: Opening business locations using bank loans and/or the profits of already opened units.
- Dealers or distributors: In a distribution relationship, products are purchased from a manufacturer and then sold through local distributors.
- Agency relationships: These are similar to the relationships you would have with merchants, but in this case, an agent or representative of your company sells your services to a third party. The important difference to keep in mind so that the relationship doesn’t stray into franchise territory is that you, as the provider of the services, are paying the agent (as an independent sales representative), not the agent collecting the money and paying you.
- Joint ventures: In this case, as the concept owner, you would engage a business partner who would also invest their own funds in the company. Both of you would then share in the equity and profits equal to the percentage of your investment.
The appropriate method for growing your business depends on several factors, including the nature of your concept, service or products; your risk aversion factor; your access to capital; where you are; and current market conditions. So if you choose an option other than franchising, be careful not to slip into franchising. Federal Trade Commission regulations define a franchise as meeting at least three standards: a common name, fees and royalties paid by the franchisee to the business, and ongoing support and control of day-to-day operations by the franchisor.
Remember: As you embark on an expansion method, you may consider changing that structure with legal and professional advice if your business needs require a change in strategy. Case in point: Some licensors will eventually convert licensees into franchises under a newly drafted agreement and program if they see the need to change the fee structure and retain additional control over operations.
Slow growth can be detrimental to a business, but not choosing the right vehicle for that growth can be worse than standing still. That’s why you should do your homework – consult with professionals like lawyers, accounting and franchising consultants, and talk to others in the same boat as you – so you don’t drift too far from shore.