Published On: September 8, 2025
Category: Business Formation
Franchises often arise as a licensor expands the reach of its trademark licenses to various businesses, necessitating the consolidation and strengthening of these licenses. The prospective franchisor may want more oversight and consistency across the brand, so a franchise relationship is often the next step. In many instances, this makes sense and can build an incredible brand in the marketplace. However, converting from a licensing arrangement to a franchise structure can create several significant legal and business complications.
Regulatory and Disclosure Issues
- If your licensees operate in different states, you will need to register as a franchisor in each relevant state, which can be a time-consuming and expensive process.
- Existing licensees must receive a complete Franchise Disclosure Document (“FDD”) before signing new franchise agreements.
- Some states have relationship laws that may restrict your ability to terminate existing agreements arbitrarily.
- Federal and state franchise regulations may require specific disclosure periods before conversion.
Contractual and Legal Challenges
- Existing license agreements may contain provisions that restrict termination or require specific notice periods.
- Licensees might claim breach of contract if termination isn’t justified correctly in the existing terms.
- Some may have renewal rights or evergreen clauses that complicate termination.
- Potential lawsuits from licensees who refuse to convert or feel coerced into doing so.
Financial and Operational Disruptions
- Licensees may resist new fee structures (initial franchise fees, ongoing royalties, marketing funds).
- Business interruption during the transition period could affect revenue and relationships.
- Costs associated with creating FDDs, legal compliance, and potential litigation.
- Some licensees may choose to terminate rather than convert, which can reduce your network.
Relationship and Competitive Risks
- Loss of goodwill with current licensees who may view this as changing the rules mid-game.
- Licensees might band together to negotiate collectively or resist changes.
- Those who refuse to convert may become competitors by adopting similar business models.
- Damage to your reputation in the industry.
Strategic Considerations
- Consider whether you can achieve your goals through amendments to the license agreement instead.
- Evaluate if a voluntary conversion program with incentives might be less disruptive.
- Assess whether the benefits of the franchise model outweigh the transition costs and risks.
Thinking About Converting Licensees Into Franchisees?
Shifting from a licensing model to a franchise structure can strengthen your brand but also brings complex legal, financial, and regulatory challenges. Before making the transition, it’s critical to understand your obligations and risks. Our experienced franchise attorneys can help you evaluate your options, protect your interests, and design a strategy that works for your business.
Contact Lantz Law Group today at 720-571-8620 or fill out our online contact form to discuss your licensing or franchise conversion plans.