Are you looking to grow your business? Franchising and licensing are both methods of expansion. Sometimes, the lines between the two seem blurred but whether you enter into a franchise or license agreement significantly impacts the business partner relationship and the level of control maintained by the original business owner.
What is a licence agreement?
A licence agreement is a contract which gives the licensee the right to use the property of the licensor, but it does not transfer ownership. In the case of intellectual property, this could be a company’s brand and logo. Licensees generally establish their own operating systems and marketing plans.
What is a franchise agreement?
A franchise agreement is a written, oral or implied agreement which enables the franchisee to establish a business under the same name, brand and business system as the franchisor’s business. Under a franchise agreement, the franchisor maintains significantly more control over the franchised business. This agreement outlines how the franchise must operate the business, provides a marketing system/plan and generally provides for ongoing training and support from the franchisor.
Distinguishing between the two
Under the Franchising Code, an agreement is considered a Franchise Agreement where:
- A person grants another person the right to carry on business in Australia under a specific system or marketing plan.
- The system or marketing plan is substantially determined, controlled or suggested by the franchisor.
- The business is associated with a particular trademark, advertising or commercial symbol owned, used, licensed or specified by the franchisor.
- The franchisee is required to pay, or agree to pay an amount to the franchisor before starting or continuing the business.
The key difference comes down to the level of control held by the franchisor/licensor over the operating system or marketing plan of the franchisee/licensee.
Importance of knowing the difference
It is important to understand whether you have a licence or franchise agreement as the Franchising Code will apply to any agreement that is considered to be a franchise agreement (regardless of whether it is called something else).
There are strict compliance obligations under the Franchising Code and a failure to realise these obligations can lead to serious legal consequences. Among other obligations, the Franchising Code includes specific disclosure requirements when entering into a franchise agreement, a requirement to act in good faith and a dispute resolution procedure. Read more about compliance with the Franchising Code here.
Should I licence or franchise my business?
There are benefits to both the licensing and franchising model. The best option for you really depends on the type of business and how you want it to grow. It is important to consider the long term impact of this decision, particular in terms of how much control you want to have over companies operating with your intellectual property.
A licence agreement tends to be cheaper to set up than a franchise operation, although the licensee also usually pays fewer fees than a franchisee. It also requires less involvement from the licensor than a franchisor. A franchisor is continually involved in the business through ongoing training and support of the franchisee as well as developing the business and marketing systems.
The main difference between a licence and a franchise model of expansion is the level of control and responsibility held by the original owner. Despite its name, a licence agreement may be held to be a franchise agreement if the licensor substantially determines, controls or suggests the business system or marketing plan of the licensee, meaning the purported licensor must fulfil the greater legal obligations of a franchisor to avoid legal consequences. For this reason, licence and franchise agreements must be carefully drafted to ensure parties achieve the intended business relationship which is best suited to their needs and the needs of the business.