Ahh, “Do it yourself-ers”, you’ve got to love them. Entrepreneurial spirit is great when running a business and forging new paths or discovering new ways of how to do things. However it is not always so great when it comes to trying to skirt regulations or short circuit requirements for financial gain. Below we are sharing with you a true story of licensing gone wrong when a business owner tried licensing their business a quick and dirty way (instead of franchising it).
We received a call from a business owner (let’s call her Ellen for the sake of this story) who wanted to franchise her service-based business. In conversation, it turns out that Ellen is actually the daughter of someone who called us over a decade ago inquiring about how to franchise the exact same business. Ellen is now operating her own location of the business her dad started. In other words, Ellen found us again having no idea that we had a detailed conversation with her dad all those years ago. It is great she found us again and this now sets the back drop for this horror story.
Apparently a lot happened in the decade or so since Ellen’s dad originally called us. The dad admitted that he never wanted to go through all the complexities or costs of franchising and instead wanted to do something simple and so he licensed his business (learn the differences between licensing and franchising). He thought he was pretty creative skirting around the franchising requirements… until now when things have started to take a turn for the worse. Some of his licensees are getting pretty pissed off about their arrangement. All of this is what led Ellen to us. So what exactly happened with these licensees to push Ellen and her dad to revisit the idea of franchising? Let’s take a few moments to explain.
Licensing That Went Wrong
After deciding not to franchise dad went into different markets, opening up more locations of the business, sold them for tens of thousands of dollars and financed the sale of those businesses for the buyers. On top of that dad had these buyers sign a license agreement. He ended up doing so many of these license agreements over the years that each one was completely different because he solicited advice from different attorneys all along the way. In other words, he mashed together different license agreements with some of the most outrageous terms our President Dave has ever seen. It is important to know that he did not require any of his licensees to use the name of his business. The only consistent part across these license agreements was that he was collecting a royalty from these buyers who were now licensees (read this article to get an easy explanation on the definition and structure of royalties). He justified the amount of this royalty by how large of a “protected territory” he was giving to buyer of the business (now licensee). The more area the licensee was given the higher the royalty and it came with some type of guarantee no one else would do business in their market. The bottom line is that dad is getting a royalty not for deliverables but for a geographical area where the buyer (now licensee) can do business. In other words for air.
Then came the problems! According to dad some of his licensees were doing business in other people’s area. So his licensees felt they had no reason to pay him any type of royalty because if he cannot protect their area (as outlined in the license agreement they signed) then they considered their agreement with him invalid. At the time of this conversation things really started to unravel and he is now forced to take action against one or more of his licensees and try to defend claims brought against him for breaching contract.
He figured he was crafty not requiring them to use his name for their business, but still providing some geographical protection, marketing and operational support. Basically he built his program on a promise of something intangible. His reasons for collecting what he refers to as a royalty are way off base.
What Happened?
This is where the daughter steps into the picture. She is inheriting this mess of licensing gone wrong and why she called The Franchise Maker inquiring about franchising. Dad is in the process of wanting to terminate some of his licensees. Dave advised him to seek an attorney to help him get that done. He wants to send cease and desist letters to some of these licensees that he was once so eager to bring on (and now even more eager to dump). It’s only a matter of time before different regulators in the states in which he has these license relationships catch on that he is crossing the line as a franchise. It seems all too familiar that all the cushy money that he has collected which has enabled him to retire may very well go to attorney fees.
Moral of the Story
There are no shortcuts when it comes to what you can and cannot do with regards to franchising. Getting the relationship set up correctly and the proper protections for you and your franchisees are crucial. Not to mention complying with franchise relationship laws which have government oversight. When working with us, we explain every element of franchising, train our clients on how to be a franchisor and have the knowledge and skills to create a customized franchise program that protects the business, its trade secrets and most importantly complies with franchising laws (read more about how we create custom franchise programs). We have even been successful at helping some businesses unwind their “licensing gone wrong” situations and turn their business into a franchise. However as you can see from the horror story above, it’s better to do things right from the start.
If you are thinking of jumping into any type of licensing arrangement and want to avoid your own horror story or if you simply want to get more clarity on how franchising works, then give us a call directly at 1-877-615-5177 to learn more.
- Options When Expanding Your Business
- What it Takes to Build a Successful Franchise
- Mistakes to Avoid When Franchising
- What is a Franchise Territory
- Is Your Business Franchisable
- Restaurant Franchising
