The Franchise Trap: What Every Brand Owner Needs to Know Before Licensing Their Trademark

Picture this: You’ve built a successful business around a recognizable brand. Another company approaches you, eager to use your trademark in exchange for ongoing fees. It seems like easy money—a straightforward licensing arrangement that will generate revenue without much effort on your part. You draft an agreement, include some quality control provisions to protect your brand, maybe offer a little training to make sure they represent you well, and you’re off to the races.

Six months later, you receive a letter from the FTC. Or worse, you’re served with a lawsuit. It turns out that what you thought was a simple trademark license was actually a franchise—and you’ve been operating as an unregistered franchisor in violation of federal and state law.

This isn’t a hypothetical. It happens to sophisticated business owners more often than you’d think. And the consequences can be severe: penalties that can reach $11,000 per day, per violation, plus potential liability for rescission of the entire agreement.

In this article, I’ll walk you through what separates a legitimate trademark license from an accidental franchise, explain how trademark assignments fit into the picture, and share the practical strategies I use with my clients to structure these relationships correctly from the start.

The Three-Legged Stool: What Makes a Franchise

Under the FTC Franchise Rule—and similar state laws—a business relationship becomes a franchise when three elements are present. I like to think of it as a three-legged stool: if any one leg is missing, you don’t have a franchise. But if all three are present, you’re a franchisor whether you intended to be or not.

Leg One: The Trademark. The licensee gets the right to operate a business identified with your trademark, or to sell goods and services associated with your brand. This element is almost always present in any trademark licensing arrangement—it’s the whole point of the deal.

Leg Two: Control or Assistance. You exert significant control over how the licensee operates their business, or you provide significant assistance to their operations. This is where most accidental franchises are born. That helpful training program? Those detailed operating procedures? The marketing support you thought would protect your brand? They might be pushing you into franchise territory.

Leg Three: The Fee. The licensee pays you money—and this includes more than just obvious royalty payments. Required purchases of supplies, training fees, marketing contributions, even payments for point-of-sale materials can qualify. The FTC takes a broad view of what constitutes a “required payment.”

Here’s what trips up most business owners: you can explicitly state in your agreement that “this is not a franchise“—and it won’t matter one bit. Franchise laws are consumer protection statutes. They look at the substance of your relationship, not the labels you put on it. If it walks like a franchise and quacks like a franchise, regulators will treat it as a franchise.

Finding the Licensing Sweet Spot

So how do you license your trademark without accidentally becoming a franchisor? The key is understanding what you can control versus what you can’t.

As a trademark owner, you’re not just allowed to maintain quality control over how your mark is used—you’re required to. A trademark license without quality control provisions is what lawyers call a “naked license,” and it can actually result in abandonment of your trademark rights. So quality control is essential.

The difference between legitimate quality control and franchise-triggering assistance comes down to scope. Think of it this way: A licensor cares about the end product—is it up to your standards? A franchisor cares about the entire operation—how the licensee runs every aspect of their business.

You can approve how your logo appears on their signage. You can require that products meet certain specifications. You can inspect finished goods to ensure they meet your quality standards. What you can’t do—at least not without triggering franchise status—is tell them how to hire employees, prescribe their hours of operation, require them to use your point-of-sale system, or mandate that they follow your operations manual for running their day-to-day business.

When Transfer Makes More Sense: Trademark Assignments

Sometimes the right answer isn’t licensing at all—it’s assignment. While a license lets someone else use your trademark while you retain ownership, an assignment is a permanent transfer of ownership from you to someone else.

Assignments come up most often in the context of business sales, mergers, or restructuring. If you’re selling a product line, the buyer typically wants to own the associated trademark outright—not license it from you indefinitely.

But there’s a critical rule that catches many people off guard: you cannot assign a trademark “in gross.” A trademark must be transferred along with the goodwill of the business associated with that mark. What does that mean practically? It means you can’t just sell the trademark itself as if it were a piece of real estate. You have to transfer it together with something substantive—the customer relationships, the reputation, the business assets that give the mark its meaning in the marketplace.

An assignment “in gross”—without the associated goodwill—can actually invalidate the trademark. The new owner might think they’ve acquired a valuable asset, only to discover it’s worthless because the assignment wasn’t properly structured.

There’s another limitation worth knowing: intent-to-use trademark applications cannot be assigned except to a successor of the business to which the mark pertains. So if you’ve filed an application for a mark you haven’t used yet, your options for transferring it are limited until the mark is actually in use.

A Practical Framework for Getting It Right

Through my work with clients navigating these issues, I’ve developed a framework for evaluating any proposed trademark arrangement. Before you sign anything, ask yourself these questions:

What am I really trying to accomplish? If you want ongoing revenue from your brand while maintaining ownership, you’re looking at a license. If you want a clean break and a lump sum payment, you’re looking at an assignment. If you want to expand your business through independent operators who replicate your entire system, you might actually want to be a franchisor—just do it intentionally and compliantly.

What level of control do I actually need? Be honest with yourself. If you can’t sleep at night unless the licensee follows your procedures to the letter, that’s a sign you might be better off either franchising properly or not licensing at all. If you’re comfortable focusing solely on the quality of the final product, a well-structured license can work.

What fees will change hands? Map out every payment that will flow between you and the licensee. Royalties are obvious. But what about required purchases? Training fees? Marketing contributions? Technology fees? Each one needs to be evaluated in the franchise analysis.

Which states are involved? Remember that franchise definitions vary by state. Some states use a “community of interest” test that may be broader than the federal standard. If your licensee will operate in California, New York, or any other state with franchise registration laws, you need to analyze compliance state by state.

The Bottom Line

Licensing your trademark can be a powerful strategy for generating revenue and expanding your brand’s reach. Franchising can be an even more powerful growth engine—when done intentionally and in compliance with applicable law. And trademark assignments can be the right tool for business transitions and restructuring.

The key is understanding which tool fits your situation and structuring the arrangement correctly from the start. The cost of getting it wrong—regulatory penalties, rescission liability, damaged relationships—far exceeds the investment in getting it right.

If you’re considering any of these arrangements, I’d welcome the opportunity to discuss your specific situation. These relationships are too important—and the risks too significant—to navigate without experienced guidance.