Franchising is a highly regulated and structured type of license that comes about when a company offers the opportunity to purchase the right to use its intellectual property and developed systems. Although it is a very popular form of business expansion, franchising is not easy, and not cheap. In fact, IT is a quite complex structure that generally requires more legal and administrative costs compared to non-franchised businesses.
Therefore, it should be taken into consideration that there are some alternatives for expanding businesses that might be appropriate, depending on the different business goals and on the methods to achieve them. By choosing any of such alternatives, Italian Franchise Law will not apply. Apart from company-owned units, there are two main options.
Licensing is very similar to franchising, but at the same time different. The main differences between a simple trademark license and a franchise are:
- the licensee typically does not get the right operate a business that is substantially associated with the licensor’s marketing plan or business system;
- the licensor typically does not have significant control over the licensee’s business, and
- the licensor typically does not provide significant assistance to the licensee.
For example, if a retailer of supplies wishes to offer its customers additional value by establishing a network of qualified contractors to provide repair services to the retailer’s customers, it could accomplish this through a trademark license arrangement instead of a franchise. Under this arrangement, the contractors pay a fee to the retailer for the right to use the retailer’s trademarks in connection with their existing business – in the form of an initial fee, or an ongoing royalty, or both. The retailer imposes quality standards on the contractors, but it does not provide a marketing plan or other significant assistance to the licensees, or impose significant controls on them.
The distributor typically is not required to pay a fee for the right to distribute the product or services involved; it simply buys products and resells them in a given territory, usually on an exclusive basis, for a given period of time. For example, if a manufacturer wishes to expand its business by helping local companies start up local distributorships that offer retail sales and service, it might provide the local distributors with training, an operations manual, marketing materials, and other significant assistance in setting up and running the business, and the distributors’ local businesses could be substantially associated with the manufacturer’s trademark, without charging the distributors any fee (other than the real wholesale price for the products).