Definition: A license or franchise license is the right owned by a person or company to deliver or produce products created by another company. In other words, a franchise license gives the franchisee the right to sell and promote the franchise’s product.
What Does License Mean?
We are all familiar with the word franchise, but most people don’t actually know what it means. The most popular restaurants in the world consist of franchises. Some good examples are McDonald’s, Subway, and Arby’s.
A business license is a contract that allows a company to do business for profit. The main two purposes of a license are to regulate the quality of businesses and restrict how many businesses can operate in a given geographical area or market. Both governmental bodies and companies issue or sell these contracts once certain conditions are met.
A good example of a business license is an accounting firm. State governments have specific rules and requirements that must be met in order to start a public accounting firm in their jurisdiction. Once you fulfill all of the state CPA requirements, you can apply for a state license. You can think of this application process as asking the state for permission to practice. Your CPA license is written permission from the state allowing you to practice accounting.
A franchise is really just a simple agreement between two parties: the franchiser and the franchisee. Let’s take Subway for example. Subway is a restaurant or franchiser that sells the rights to use and distribute its products to franchisees the individual restaurant owners. All franchise agreements are slightly different, but most of them have a two-part payment plan.
For instance, if you wanted to start a Subway restaurant, you would have to pay Subway an initial franchise fee to obtain the franchise license. Then you would have to make monthly, semi-annual, or annual franchise payments to maintain your license. As long as you maintain your license, you can sell Subway products, market your restaurant as a Subway restaurant and have access to their suppliers.
Franchises are very popular because they are easy to start and almost guarantee initial customers. Take our Subway example for instance. If you opened a Subway, you would most likely have a loyal customer base from the day you open your doors. This probably wouldn’t be true if you started a “mom and pop” sub shop.