Converting a License System into a Franchise in North Carolina

The owners of businesses, intellectual property, and business models have many ways to leverage their success into greater profits but two of the most popular options are to license or franchise the business to other parties. For parties who already have a licensing system with other business owners, they may wish to take their business model to a different, and more protected, level. This may involve converting that existing licensing system into a formal franchise system to create a potentially larger passive revenue stream with enhanced protection for the business owner. While this process is not quick and requires a great deal of work at the beginning, it may be a better option to leverage your business model and product/service to gain market share and penetration.

License Systems vs. Franchise Systems

The owner of intellectual property, a business model, brand, or product recognizes that there is value in that patent or trademark. In an effort to increase short-term profits, owners may license the right to use their trademark or product to another party. Licensors have no obligation to provide support, instructions, or marketing and in many instances can accidentally run afoul of franchise laws which can be detrimental to the business overall.

By contrast, franchise agreements create a stronger bond between franchisor and franchisee. While a franchise system still allows the use of the trademarked property or a product/ service, the franchisee may only use the franchised elements in a certain way and the franchisor must provide support to the franchisee. However, franchisors are often able to make more money through a franchise than a simple licensing situation. Both parties may find greater success after converting a licensing system into a franchise.

How to Convert a License System in North Carolina

Converting a license system into a franchise system in North Carolina differs depending on timing. If a license system has expired, the licensee no longer has any right to use that intellectual property (or “IP”). If the IP’s owner wishes to transform the arrangement for renewal under a franchise structure, they are free to do so, and the former licensee is free to refuse to enter this converted arrangement.

Other situations may call for a conversion during a current license term and both parties must negotiate the transfer of this structure. Common issues to discuss during this negotiation process includes:

• Whether a franchise fee will apply.
• The new royalty structure.
• What effect the change will have on the licensee’s business structure.
• What new forms of training or guidance the franchisor will be required to provide.

Creating a franchise structure also carries various legal ramifications such as whether the franchisor will have to file its franchise disclosure document (FDD) with the North Carolina Secretary of State (depending on their trademark registration status) as well as meeting various zoning and workplace safety requirements. Additionally, franchisors may face liability in a crisis where a licensor does not usually have this risk. When converting a North Carolina licensing agreement to a franchise, it is essential to consult an experienced franchise business lawyer for advice on potential issues with changing the structure of brand expansion.

An Attorney Could Help With Converting a Licensure to a Franchise

Trademark or patent holders may realize that their property has value and they may be tempted to gain short-term profits by licensing their product. However, as the value of that property grows or the potential for expansion in the marketplace becomes easier, it may benefit a licensor to consider switching to a franchise structure.

Changing a license system to a franchise system is rarely easy and if the parties are still in the midst of a license agreement, any change must be the result of mutual agreement. Working with a lawyer could provide insight into the pros and cons of converting a license system into a franchise in North Carolina. Contact an attorney today to discuss your options and how best to handle your brand moving forward.