Most business owners want to achieve some form of steady long-term growth. For those owners who have established a true network of licensees that are marketing goods or services under a successful brand or trademark, such growth may be accomplished through converting this license system to a franchise system.

The business model to be franchised must be capable of replication and not dependent on certain unique or exceptional circumstances. The nuts and bolts of the business operation must be easily transferable to franchisees so that they may continue prior success without relying on centralized management. In the case of converting a license system to a franchise system, licensees are tried and tested making it easier to estimate future success once they technically convert to a franchise.

Owners considering franchising their business operation may already have such a system operating. Too often, business owners believe they have adopted a license system when they have actually implemented a disguised franchise system. At this point, to avoid allegations by state regulators that illegal franchises are being sold, it is important to promulgate an effective strategy for converting the license system to a franchise system.

Evaluation of applicable state franchise laws and regulations, as well as the structure of the licensing system, including all licensee agreements, is necessary to make a successful conversion to a franchise system. A focus and approach are essential that preserves the existing business network while resolving any legal claims by licensees, state regulators, and third parties, prior to the initial implementation of the franchise system. The latter helps ensure that, from its inception, the business entity is in good standing with the state once properly registered.

Determining the “franchisability” of a business is a complicated analysis, especially if converting a pre-existing licensing system to a franchise system.

For more information on Franchise Law, read our Franchise Law Newsletter.