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Not all businesses can be franchised, nor should they. As the founder and operator of a new and exciting concept, it’s hard not to imagine opening a unit on every corner and becoming the next franchise millionaire. It’s a common dream. At one time, numerous concepts claimed to be the next “McDonald’s” of their industry.
And while franchising may be the right growth vehicle for someone with an established brand and a proven concept ripe for growth, there are other options available for entrepreneurs looking to expand their concept into prime locations before the competition does, but who don’t want to do it alone for a variety of reasons. For example, they may not have the resources or cash reserves to finance a franchising program (it is important to note that although franchising a company leverages the time and capital of others to open additional units, creating a franchising system is certainly not a bad choice). -effort in terms of costs). Or they don’t want the responsibilities and relationship of being a franchisor and would rather focus on running their core business, not a franchise system.
Related: The Pros and Cons of Franchising for Your Business
But when you have enthusiastic customers asking to open a branded location like yours in their neighborhood, it’s hard to resist. You might be thinking: What if I don’t take the deal and miss out on an opportunity that may not come again?
Licensing your intellectual property, such as your name, trademarks and trade dress, in exchange for a flat fee or a percentage of sales is one way to achieve this without having to go down the somewhat more laborious and legally controlled franchising route . The types of licensing agreements range from granting a license to allow another entity to produce or manufacture your products to allowing someone to use your logo and name for their own business. Unlike a franchise, your partner in a licensing situation will only be given certain pre-determined rights to sell your products and services, not an all-inclusive deal to give them a turnkey business, accompanied by training and support, in exchange for fixed rates. A license agreement specifies the rights, responsibilities, and what each party can and cannot do under the terms of the agreement. Having an attorney draft the paperwork is critical, as is consulting a trusted business advisor who has helped others along this journey and can shorten the learning curve while protecting your rights. Licensing agreements are governed by contract law as opposed to franchising laws. However, care must be taken: to ensure you stay in your lane and don’t trespass into the franchisor’s territory, you’ll want your advisors to detail what you can and can’t do as a licensor.
For example, a licensing agreement excludes you from involvement in the day-to-day operations of the licensee’s business. While the absence of oversight may seem like a relief, it can be a double-edged sword, especially for people who are used to controlling all aspects of their products or services. You won’t have to provide licensees with ongoing services, like marketing materials and ongoing training, but it also means you have no control over how they run their business, their product mix, or even how they decorate their spaces. If you’re type A, this might be difficult for you.
Most people are most familiar with third-party trademark licensing because these agreements are important in the sports and entertainment industries, where a celebrity lends their name to endorse a product, whether it’s sportswear or brand or trendy restaurant menu items like pizza, chicken or even ice cream.
Using a celebrity’s cache attracts media attention that you might otherwise never receive. But not everyone who comes up with a great concept or product has the recognition that would allow them to attract celebrity business partners or sponsorships, and avid fans who follow them.
There are other ways to get your products in front of more consumers. Some coffee concepts, including Caribou for example, have created market saturation through both franchising traditional stores and licensing non-traditional locations, such as airports, department stores, and college campuses. Others, however, like Starbucks, employ a combination of company-owned stores and licensees in high-traffic locations where a small kiosk can serve a high-density population of shoppers. And, of course, bags and pods of these brands’ coffee blends are also sold in retail outlets such as grocery stores.
Related: Startups need to protect their brand. Here’s how and why
But again, here’s a note of caution: If you go the route of licensing your products or services, be careful not to cross over into trying to direct how licensees do their business, from selecting locations to training of employees.
While licensing or franchising can be viable business growth vehicles for many brands, additional business structures that may be considered include:
- Company-owned stores: Opening of corporate offices using bank loans and/or profits from already opened units.
- Dealers or distributors: In a distribution relationship, products are purchased from a manufacturer and then sold through local retailers.
- Agency relationships: These are similar to the relationships you would have with resellers, but in this case an agent or representative from your company sells your services to a third party. The important distinction to remember so that the relationship does not cross into franchise territory is that you, as the service provider, pay the agent (as an independent sales representative) rather than the agent who collects the money and pays you.
- Joint ventures: In this case you, as the owner of the concept, would hire an operating partner who also invests his own funds in the company. The two of you would then share the capital and profits at the percentage rate of your investment.
The appropriate method to grow your business depends on several factors, including the type of concept, service, or product; your risk aversion factor; your access to capital; where are you; and current market conditions. So, if you choose another option for franchising, be aware that you don’t slip into becoming a franchisee. Federal Trade Commission regulations define a franchise as meeting at least three standards: a shared name, commissions and royalty payments paid to the company by the franchisee, and ongoing support and control of daily operations by the franchisor.
Keep in mind that if you start with an expansion method, you may consider modifying that structure with legal and professional guidance should your business needs merit a change in strategy. Case in point: Some licensors will end up converting licensees to franchises under a newly created agreement and program if they see the need to change the fee structure and maintain additional control over operations.
Slow growth can be bad for a business, but not choosing the right vehicle for that growth can be worse than standing still. That’s why doing your homework, consulting with professionals, such as lawyers, accounting and franchising consultants, and talking to others in the same boat will keep you from drifting too far from shore.