Over the last several years I’ve had an opportunity to review many "License Agreements" that were actually thinly veiled attempts by companies to avoid franchising and the disclosures and regulations that come with it. It’s understandable why these businesses might want to avoid franchising. The costs of preparing franchise disclosure documents (FDDs) can be very expensive and the hassle of registering a franchise in many states is not only expensive but very time consuming. The regulations you have to deal with in franchising can be a burden.
Charles Internicola discusses all of this in a recent blog post entitled Blatant Franchise Violations:Franchise Agreements Disguised as Franchise Agreements. It’s a great post and definitely worth a read. Charles comes at the issue more from a franchisor point of view. There are significant risks for businesses that draft license agreements that are actually franchise agreements. As Charles says, the potential litigation risk and liability exposure is not worth the cost savings that these business "save" by not setting up a proper franchise entity.
But it’s also important for prospective "licensees" to consider whether a company that is willing to take these short cuts, it truly a business worth investing in. At the end of the day, I’d caution anyone to invest in a business that is not set up properly and within the applicable regulations. The problem is most prospective "licensees" don’t know better. That’s why it is so important to seek legal counsel and have such an agreement reviewed before entering into a business license or franchise agreement.
As Charles said in his post,
When it comes to franchising, there are no shortcuts. "Dressing up" your franchise as a license, in the long-term, will not work and is not worth the future cost or risk.
And on the licensee or franchisee side, the same holds true. Investing in a company that takes short cuts will not work and it is also not worth the future risk or costs of your investment.