Franchise Lawyer Blog

Credit Crunch:

This topic has been previously discussed by us and is still a hot topic of discussion.

As today's Orlando Sentinel notes:

"Usually, a downturn increases interest in franchises as people laid off from corporate jobs try opening their own restaurants, convenience stores and child-care centers.

This time, though, the tight credit market has made it difficult for would-be business owners to find financing, something that's "really wreaking havoc on the sale of franchises," said Alisa Harrison, a spokeswoman for the International Franchising Association."

SBA Lending:

We have writtten previously about franchising and Small Business Administration lending. The subject is touched upon again in the June/July issue of Franchise Times. In a section called "Dollar Signs," the magazine notes that while SBA lending has increased since the beginning of the year, nevertheless the total for this year (20,997 loans) remains at half of the number approved at the same time a year ago. The IFA is predicting that franchise lending will decline 40 percent this year, which will cost the country 50,000 jobs and $5 billion dollars in economic activity. A recent survey suggests that three-quarters of lenders believe that they will ulitmately increase lending as a result of stimulus policies, so a guarded optimism may not be misplaced.

.

A potential client called the other day and described a potential business venture to me. He said that he wanted to structure it as a license rather than "getting involved in all of the complications of franchising."

As an aside, we have written on the topic of franchising vs. licensing previously.

Recently, the American Bar Association's Forum on Franchising's Listserv, which we have discussed before , featured a long chain of emails on the same subject, during which many opinions were offered as to what defines a license and a franchise, as well as the gray area between them, and whether those definitions can be manipulated to one's benefit.

However, one writer offered the clearest bit of advice. He suggested that his esteemed colleagues, being lawyers, were focusing on the legalities of the situation to the exclusion of everything else, including good business sense. He proposed that the proper approach is to look at the business being contemplated and decide what is the best model for its expansion. Forget the law, don't even talk to your lawyer unless he is able to not miss the forest for the trees. When that business model is clearly established, then apply the tests to determine whether or not it needs to be structured as a licensing arrangement or a franchise system.

More often than not, the situation will call for a franchise model. This is because the three prong tests that we have discussed before identify three elements that most successful business models will want to include. The three prong test identifies (i) a fee as a condition for entry into the business; (ii) the use of a trademark; and (iii) a marketing plan or system. It's sometimes hard to imagine how to license a trademark, while properly protecting your rights by controlling its use, without qualifying oneself as a franchise.

But if the model calls for a franchise, we tell our clients not to look for a way around it but rather to embrace it. As franchise regulation evolves and the models become more refined, it continues to establish itself as an extremely efficient means of exponentially expanding the number of units of a particular business.
.