Licensee, Dealership, or Franchise
Businesspeople are often confused about the differences between a licensee, a distributor, and a franchise. Nevertheless, the decision to use one depends on your needs and risk exposure.
License agreements document the use of company brands and intellectual property such as trademarks, logos, copyrights, and patents with specific terms. The property owner grants its use to another in return for a fee (“royalty”). Drafters of licenses should avoid any control or financial interest in the licensee’s operation. Popular brands like Disney and the Orlando Magic grant licenses for millions of dollars in fees independent of their licensee’s other business revenue or profits.
The similarity between distributor and franchisee confuses many because of their use of brands and logos. Manufacturers use dealers to distribute and sell their products or services to the public. Distributors typically buy products wholesale from the manufacturers and then markup the price for retail sales. Distributors do not operate under the name of the manufacturer whose products they distribute.
hey may represent multiple manufacturers and benefit from national marketing campaigns or the manufacturer’s advertising dollars. However, the manufacturer has no control or responsibility for the distributor’s operations as long as the distributor maintains the conditions of their agreement.
Manufacturers can recommend “list prices” (think automobile dealerships) but do not control the prices set by the dealers. They can offer dealers incentive sales programs or training but cannot require dealers to participate. Though sharing common interests, the manufacturer and its dealers are independent businesses.
A franchise is a network of businesses that have purchased the right to operate under an established company’s trademark, name, and proprietary processes (the franchisor).
The franchisee typically pays an initial fee and ongoing royalties to the franchisor. The franchisor generally provides marketing and training support with specific guidelines to ensure the franchisee replicates the business practices dictated by the franchisor.
The franchisor typically dictates site design and approval, product or service procedures, employee training, hours of operation, pricing, marketing promotion and advertising, décor, and the type and equipment required.
The FTC and State laws regulate the solicitation and sale of franchises. Franchisees have special legal protections beyond the remedies available to licensees and distributors. Regulators justify the added protections by the franchisee’s dependence on the franchisor’s representations (or lack thereof).