Instead of buying a franchise or starting their own venture from scratch, some entrepreneurs decide to purchase a license to use a business system. Before you decide to do this, it’s important to understand the advantages and disadvantages of business system licensing.
Like a franchise, licensing a business system helps you avoid reinventing most of the wheel, i.e., a lot of things you would learn in a new startup through trial and error can be provided to you through a system that should already demonstrate what works.
In addition to saving time and money, a business system license agreement should be far more flexible for you than the requirements imposed by a franchise agreement. This is true for two reasons:
1. There are more laws and regulations that govern the franchisor-franchisee relationship; and
2. To protect its brand, a franchisor typically will impose more restrictions on what a franchisee can and cannot do.
Although it may seem that a business system license is the ideal compromise between franchising and starting a new business entirely on your own, understand there can be some downsides too.
Franchises are usually territorial in nature so that each franchisee doesn’t compete with another franchisee in the same geographic area.
For example, McDonalds is not going to sell competing restaurant franchises on the same street corner. This increases the chances each franchisee will survive.
Conversely, business system licensors are notorious (with some exceptions) on selling multiple licenses that compete for the same market.
For instance, there’s a famous gym licensor that will essentially license its system and name to anyone willing to pay the fees. And, because of this, there may be a half dozen licensees competing in a market that can only support one or two gyms. It’s a recipe for business failure.
As a general rule of thumb, the licensor’s brand may not be as strong as one protected by a franchising system.
Of course, you may not want to use the licensor’s brand but instead are looking just to buy a system that works. This makes sense where you’re starting a noncompeting small business in another region (e.g., pawn shop, HVAC repair, etc.) but want to build it under your own name instead of the licensor’s brand.
If you need help licensing a business system, set up a phone consultation with Business Lawyer Mike Young.