What Is a Franchise License?

Budding entrepreneurs can start a business from scratch or they can choose to represent an already-established brand through starting a franchise.  This arrangement happens with many well-known businesses and restaurants that people frequent every day. But what does it mean when you open a franchise?

What Is a Franchise?

A franchise license helps create the commercial and contractual relationship between the franchisor and the franchisee.  It passes on certain rights to the franchisee to use the name, logo, and identity of an established brand to start a branch of the franchise.  Franchise licenses can give small business owners rights to different aspects of the operation of the business.

There are two main types of franchise licenses:

• License to use product or trade name is where the franchise owner sells the franchisee a license to use the right to the name and trademark.  It is the more basic form of a franchise license. The franchisee has significant control and is on their own regarding the overall business decisions.
• License to use the business format gives the entrepreneur access to the business model of the franchise. Usually, it entails a continuing commercial relationship and level of control between the franchisor and the franchisee.  This can include training, input on selecting a location for the branch, supplying products for the franchisee to sell, an operating manual for the business, business goals, marketing strategies, and possibly assistance in financing the venture.

Important Franchise Documents

If you are considering a new franchise business make sure you know all of the details before signing a franchise agreement. It is a binding contract that you must follow under general contract law. The Federal Trade Commission (FTC) requires that the franchise provide you with a franchise disclosure document at least 14 days before any agreement can be signed.

You should speak to a local attorney to confirm the FDD and the franchise agreement have every detail outlined. For example, it should spell out the initial franchise fees, any ongoing fees to be paid, the degree of control the franchisor will retain over business operations, and any ongoing royalties. Your attorney can also make sure you are complying with the franchise laws and legal regulations of your state.

Related Resources:

• Filing for Bankruptcy as a Franchisee (FindLaw’s Law and Daily Life)
• Buying a Franchise: Overview (FindLaw’s Learn About the Law)
• Legal Advantages and Disadvantages of Buying a Franchise (FindLaw’s Learn About the Law)