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Licenses and Distributorships

Alternatives to Franchising

Licensing, distributorships, and other opportunities

Although franchising is a popular way to expand a business, a number of alternatives may be better suited to your unique marketing goals. At The Johnson Franchise Law Firm, franchising, licensing, and distribution attorney Rick Johnson can help determine what is the right choice for you: franchising or an alternative.

What is franchising?

Franchising is a way to expand your business by licensing certain rights to a third party. Assume that you own rights that are important to your business. Most often, the rights you own are the rights to use your trademark or service mark; your “trade dress,” or the total image of your business; and your “know-how,” or your methods for operating the business. You will license the right to use the rights you own to a third party. That makes you the “franchisor” or the “licensor.”

The third party will use those rights to open and operate his or her own business. In exchange, the third party will:

  • Pay you various fees
  • Grant you the right to control certain aspects of the way he or she operates the business

That makes the third party the “franchisee” or the “licensee.”

A benefit of franchising may be summarized, succinctly, as follows: “A franchisee pays you and uses his or her money to build your brand.”

Although franchising offers many benefits, an alternative may work better in your particular situation.

What are the alternatives to franchising?

There are several popular alternatives to franchising:

  • Licensing: In a license relationship, the licensee pays the licensor for the right to use intellectual property such as trademarks, patents, copyrights, and confidential information. The licensee usually pays a one-time license fee as well as recurring payments such as royalties or lease payments. Although the licensor will have a limited right to prescribe how the licensee uses the intellectual property, the licensor will not have the right to prescribe how the licensee operates its business.
  • Distributorships: In a distributorship, a distributor buys products from a supplier, and then sells those products to purchasers. Distributors may be permitted to have contracts with other suppliers, and may operate independently from the supplier. The supplier will not usually require the distributor to pay an initial fee for the right to distribute the product, or to pay a royalty: the supplier’s income is made from sales of products. The supplier will not have the right to prescribe how the distributor operates its business.
  • Multilevel marketing: This is a method of distribution that offers rewards and incentives for participants to recruit new participants, and for participants to sell products. Examples of multilevel marketing systems include Amway, Avon, and Mary Kay.
  • Sales agencies: Sales agencies have representatives who are independent contractors. The sales agents solicit wholesale orders for the supplier. The sales agents are compensated, in whole or in part, by commission. Sales agencies differ from distributorships in that sales agencies do not purchase products for resale or maintain an inventory.
  • Partnerships: In this arrangement, one party generally contributes a trademark or patented technology, and the other contributes money and services.
  • Business opportunities: Business opportunities (or “biz-ops”) are less structured than franchises. They are arrangements where a seller provides goods or services to enable the buyer to start a business, and where the seller represents that: (i) the buyer will earn more than the cost of the business; (ii) the seller will buy back all or part of the buyer’s product; (iii) the seller will provide or help find locations; (iv) the seller will refund the initial payment; or (v) the seller will provide a marketing or operating plan. Business opportunities are governed by the Franchise Rule and state business opportunity laws.

Rick notes that some franchisors do not want to present themselves asa franchise:

     When I speak initially to clients, the clients usually say, ‘…but I don’t want to be a franchise.’ They think that being a business opportunity will be less cumbersome than a franchise. In fact, the opposite is true. Biz-ops are generally regulated by state law. The state laws are not uniform. The business can find itself governed by 10 different laws of 18 different states. In contrast, the Franchise Rule is uniform across the U.S., subject only to a few minor changes required by a few states.”

Contact our franchise attorney

At The Johnson Franchise Law Firm, we focus on franchise law and alternatives to franchise law. With over 30 years’ legal experience and 10 years’ business  experience, franchising, licensing, and distribution attorney Rick Johnson understands the complex requirements of your business. He can help you avoid costly pitfalls. To take your business to the next level through domestic or international franchise development, or through alternatives to franchising, please contact The Johnson Franchise Law Firm today.

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