Guides
9 licensing and franchise questions to ask before you sign anything
Nine questions to ask before signing a licensing or franchise deal, from the FTC disclosure document to outlet churn and who really holds the mark.
These are the nine licensing and franchise questions to ask before you sign anything. Whether a deal counts as a franchise is not decided by what the parties call it.
In the United States, the contents decide. The components sit in the rule's definitions section at 16 CFR 436.1. Get that wrong and the seller owes you a disclosure document before anyone signs.
That fact makes franchising the best-documented corner of the name-attached world. Most name-attached ventures are private and unknowable. Franchised systems file a standardized, public document with state regulators.
The celebrity companies page explains how little the record holds everywhere else.
For readers of this site, the same record matters when a famous name is attached to a restaurant chain, gym, or retail brand. The press often covers the name. The filings, licenses, and franchise documents show who owns the trademark, who controls operations, who collects fees, and who carries the downside.
That is the investment question behind a celebrity venture. The nine questions below apply to those deals just as they do to any other franchise or license.
What to take away
- Three elements make a franchisea trademark grant, significant control or assistance, and a required payment above the FTC's indexed threshold. All three, or it is something else.
- The franchisor must hand over the disclosure document at least 14 calendar days before any binding agreement is signed or any payment made. Some states require more.
- The financial performance section is optional. When it is absent, no salesperson may supply a figure informally.
- The outlet tables show openings, closures, terminations and transfers by year. Total outlet count hides churn.
- Wisconsin, California, Washington and Minnesota publish filed franchise documents. You can read a real system's full document without contacting the franchisor.
The nine questions
Nine questions, each with an answer that sits in a specific place in the record. Ask them in order, because the earlier answers change what the later ones are worth.
- Is it a franchise under the three-part test?A trademark grant, significant control or assistance, and a required payment. The FTC indexes that payment threshold to inflation, and it has sat between $500 and $700 in recent years. All three present, and the disclosure obligations follow no matter what the contract is titled.
- Is there a disclosure document, and can you read it before you sign?Ask for the document itself and the date it was issued. The federal rule gives you at least 14 calendar days before signing or paying. A franchisor that stalls on this is telling you something.
- Does it contain a financial performance section, and what does it measure?Gross revenue or profit, all outlets or the top quartile, company-operated or franchised. Each version answers a different question.
- What do the outlet tables show over three years?Net growth, or gross growth with closures and terminations underneath it. Read the columns, not the total.
- Where does franchisor revenue actually come from?Royalties, or sales of goods and supplies to franchisees. McDonald's has listed a 4 percent service fee plus rent and advertising contributions; typical royalties across the sector run 4 to 8 percent of gross sales. When the supply line earns more than the royalty, the franchisor gains when your volume rises.
- What are the termination, non-renewal and transfer provisions?Who may end the relationship, on what notice, and what you may sell and to whom. Agreements commonly allow 30 to 90 days to cure a default. This is where most of the risk sits.
- What territory do you get, and can the franchisor sell around you?Exclusivity, if any, and whether online, grocery or other channels may reach the same customers. Many agreements reserve those channels to the franchisor.
- Where is the named individual in the structure?Franchisor, multi-unit franchisee, area developer, master franchisee, or licensor of their name. Marriott and Hilton franchise their brand names to owners who run the hotels, so the name on the sign and the owner of the business are different parties.
- Who holds the trademark, and who polices quality?A mark owner who licenses without exercising quality control risks the mark itself. McDonald's Corporation holds the McDonald's marks and licenses them to franchisees under standards it enforces.
Everything below explains what sits behind those nine.
The three-part test
A relationship is generally treated as a franchise under the federal rule when three elements are present together:
Three-Part Franchise Test
Trademark grant?
element present
not a franchise
- A trademark grant.The buyer gets the right to operate a business identified by the seller's brand.
- Significant control or assistance.The seller prescribes or materially supports how the business is run: methods, standards, training, supply chain, site selection.
- A required payment.The buyer pays, or commits to pay, the seller in connection with starting or running the business.
All three, and you have a franchise regardless of the label on the contract. The commission's compliance guide works through the borderline readings.
Remove any one element and you have something else. States add their own definitions on top, and some are broader than the federal one.
Franchise, license, and the space between
Trademark rights
- Franchise
- Granted for a system-branded business
- Trademark license
- Granted for defined goods or services
- Distribution agreement
- Limited use to resell the goods
- Endorsement or ambassador deal
- Usually the reverse: the company uses the person's name
- Management agreement
- Not necessarily granted
Operational control by the owner
- Franchise
- Significant, and part of the point
- Trademark license
- Quality control only, not method
- Distribution agreement
- Terms of sale, not method of operation
- Endorsement or ambassador deal
- None
- Management agreement
- The manager runs the business for the owner
Payment
- Franchise
- Initial fee plus ongoing royalties
- Trademark license
- Royalty, often with a minimum guarantee
- Distribution agreement
- Payment for goods, not for the right to trade
- Endorsement or ambassador deal
- A fee flows to the individual
- Management agreement
- Management fee
Disclosure obligation
- Franchise
- A pre-sale disclosure document is required
- Trademark license
- None comparable
- Distribution agreement
- None comparable
- Endorsement or ambassador deal
- Advertising disclosure rules apply
- Management agreement
- None comparable
The commercially interesting cases sit between the first two rows. A trademark license with heavy operational prescription and a required payment can be a franchise even when it is titled "license agreement".
That is why the test looks at substance rather than the label. The celebrity brands page describes what a plain license contains before any of that prescription is added.
Franchise vs. License vs. Other
Franchise
- Trademark rights
- System-branded business
- Operational control
- Significant, part of point
- Payment
- Initial fee plus royalties
- Disclosure obligation
- Pre-sale document required
Trademark license
- Trademark rights
- Defined goods or services
- Operational control
- Quality control only
- Payment
- Royalty, minimum guarantee
- Disclosure obligation
- None comparable
Distribution agreement
- Trademark rights
- Limited resale use
- Operational control
- Terms of sale only
- Payment
- Payment for goods
- Disclosure obligation
- None comparable
What the disclosure document contains
The franchisor must give you the document at least 14 calendar days before you sign a binding agreement or pay any money. That is the current federal period under 16 CFR 436.2 and 436.3, and several states require longer. Check both.
Disclosure Document Sections to Check
- Franchisor's business and its people
- Litigation and bankruptcy history
- Initial and ongoing fees
- Estimated initial investment
- Restrictions on sources of supply
The document is organized into numbered items with a fixed structure, so you can compare two of them directly. Open the document's own table of contents rather than trusting any list of item numbers. These are the sections that repay attention.
- The franchisor's business and its people.Who is behind the system, how long it has operated, and what else they have run.
- Litigation and bankruptcy history.Required disclosures about the franchisor and its principals. A pattern of disputes with franchisees is visible here and nowhere else.
- Initial and ongoing fees.The joining fee, then royalties, advertising fund contributions, technology fees, renewal fees, transfer fees. The ongoing fees, not the joining fee, set the economics.
- Estimated initial investment.A range covering everything needed to open and to survive the initial period, itemized. Common totals run from about $150,000 for a small service unit to more than $2 million for a full restaurant build-out.
- Restrictions on sources of supply.Whether you must buy from the franchisor or approved suppliers, and whether the franchisor earns on those sales.
- Territory.Whether any exclusivity exists, and whether the franchisor may sell through other channels into the same area.
- Renewal, termination, transfer, and dispute resolution.What happens when the relationship ends, who may end it, and where a dispute must be brought.
- Financial performance representations, Item 19.Covered below.
- Outlet and franchisee information, Item 20.Covered below.
- Audited financial statementsof the franchisor.
- The contracts themselves, attached in full.
The earnings claim that usually is not there
The financial performance section is optional. A franchisor may include revenue or profit information about its outlets. If it does, the information must have a reasonable basis and be substantiated on request. Or the franchisor may say nothing at all.
If that section is absent, the franchisor is making no earnings claim. No salesperson may supply one informally. A verbal figure that does not appear in the document is not a representation the franchisor stands behind.
When the section is present, read what it measures. Common variations: gross revenue rather than profit, top-quartile outlets rather than all outlets, company-operated rather than franchised outlets, and outlets above a certain age. Each is a legitimate disclosure. Each answers a different question from the one a buyer is asking.
The outlet tables
The outlet section carries multi-year tables. They show how many outlets opened, closed, were terminated, or were not renewed, by state or region.
Outlet Growth vs. Churn
System A
- Opened
- Many
- Closed
- Nearly as many
- Net growth
- Low
System B
- Opened
- Same number
- Closed
- None
- Net growth
- High
They also show how many outlets were reacquired by the franchisor and transferred between owners.
The same section lists current franchisees, plus franchisees who left during the past year, with contact information. That list exists so a prospective buyer can call them. Very few do.
This is the single most useful page in the document. Growth in total outlet count can hide substantial churn underneath.
A system that opened many outlets and closed nearly as many is not the same as one that opened the same number and closed none. The totals alone will not tell you which you are looking at.
Why "their chain" often means they are the franchisee
A person publicly linked to a restaurant chain, gym or retail brand may hold any of five roles. Public coverage rarely distinguishes them, and each produces the same sort of announcement.
Roles Behind a Brand
Franchisor
- Owns system
- Yes
- Pays royalties
- Receives
- Operates outlets
- Sells rights
Franchisee
- Owns system
- No
- Pays royalties
- Yes
- Operates outlets
- Yes
Area dev.
- Owns system
- No
- Pays royalties
- Yes
- Operates outlets
- Commits to open
Master franch.
- Owns system
- No
- Pays royalties
- Yes
- Operates outlets
- Sub-franchises
A franchisee is a customer of the brand, bound by its standards and paying for the privilege. That is a different position from owning the system.
Naked licensing: why control is not optional
Trademark law holds that a mark owner who licenses the mark without exercising quality control risks losing rights in it. A trademark signifies a consistent source. If the owner stops policing consistency, the mark stops signifying anything.
That creates a real tension in name-licensing deals. The licensor wants royalties without operational responsibility. The law expects enough control to keep the mark meaningful.
Too little endangers the mark. Too much control, combined with a required payment, can turn the arrangement into a franchise, with the disclosure obligations that follow.
Well-drafted licenses thread this by specifying quality standards and inspection rights while leaving the method of operation to the licensee. It is a real constraint, and it explains why license agreements run longer and more prescriptively than the underlying idea seems to warrant.
Where to read a filed FDD: Wisconsin, California, Washington, Minnesota
Several US states run franchise registration or filing regimes, and some publish the filed documents. Wisconsin's Department of Financial Institutions, California's DFPI and Washington's DFI post searchable records. Minnesota's Department of Commerce publishes filings through its public database, and the New York Attorney General accepts franchise filings.
You can often read a complete document for a real system without any relationship with the franchisor. McDonald's, Subway and Dunkin' all file in registration states, and a filed FDD commonly runs 100 to 300 pages. It covers:
Where to read a filed FDD
- fees
- contracts
- litigation history
- outlet churn
- audited accounts
For the underlying rules, the FTC publishes guidance on the Franchise Rule for franchisors and prospective franchisees alike. For the entity behind any system, the state company register shows status and registered agent. General background on business registration is available from the SBA's guide to registering a business.
Outside the United States, disclosure regimes vary widely. Australia's Franchising Code of Conduct requires disclosure at least 14 days before signing and adds a 7-day cooling-off period. China's Commercial Franchise Administration Regulations require 30 days. Alberta and Ontario require disclosure 14 days before signing. Many countries have no rule at all, and the only protection is the contract.
Common questions
Is a license just a lighter franchise?
No. It is a different arrangement that becomes a franchise once it acquires operational control and a required payment. The disclosure obligations that follow are substantial, so the boundary gets drafted carefully and deliberately.
Why do some brands describe themselves as licenses to avoid being franchises?
Sometimes for legitimate structural reasons, sometimes not. The label does not control the outcome; the three-part test does. Regulators and courts look at what the parties actually do.
If I read a disclosure document, will I know whether a system is a good investment?
You will know the costs, the contract, the litigation history, the outlet churn and the franchisor's audited financial position. That is more than is available for almost any other private business. You will not know how a specific location will perform.
Does a famous name attached to a franchise system mean anything?
It means marketing was purchased. Whether the name-holder is the franchisor, a franchisee or a licensor is a separate question, and the disclosure document answers it where the press release does not.
Related reading on this site: restaurant ventures covers the unit economics underneath most food-service franchises, and fashion beauty ventures covers trademark licensing where no operating system is transferred.
In this guide
- Franchises and licensing list: 5 checks for celebrity dealsFive checks for a franchises and licensing list: who controls the product, who carries the stock, what the law calls a franchise, and who staffs the operation.
- Franchises and licensing portfolio: how a mark is splitA franchises and licensing portfolio splits a mark by category, territory, channel and term. See how the divisions work and what the USPTO register shows.
- Franchises and licensing examples: Coty and RamsayFranchises and licensing examples: Coty's fragrance licenses and Gordon Ramsay's Caesars deal, tested against the FTC's three-part franchise test.
- How to vet a celebrity franchise or licensing deal before signingWhy there's no honest list of the best franchises and licensing 2027: how to vet a celebrity franchise or licensing deal before you sign.
- Franchises and licensing failures: celebrity recordsFranchises and licensing failures: what celebrity records show about F45, Material Girl, Hydraulic and Jessica Simpson—and where the records stop short.
