As your business becomes successful, you might ask yourself: what’s the best way for me to scale?
Many small businesses do this by letting others use their intellectual property to help them expand.
There are two common ways to do this – licensing and franchising.
But, there is an important difference between the two.
And if you’re not sure, you may end up walking into the territory of “accidental franchising”.
Once you become an accidental franchisor, you could be breaching the Franchising Code of Conduct if you don’t comply with all the requirements under the code.
So – how can you tell the difference?
This article will walk you through the difference between franchising and licensing, and why you need to know about them before deciding which road to take.
The Difference Between Licensing And Franchising
Licensing and franchising have one main thing in common: you are letting others use your intellectual property.
The main difference between the two is the degree of control you have when doing so.
What is Licensing?
Licensing is when you permit another business to use your intellectual property (IP) in exchange for a “licence fee”.
This could include anything from the logo to copyrighted work or a trade mark that you own.
When licensing, you can expand your brand while still maintaining ownership of your intellectual property.
At the same time, you’re able to increase revenue without incurring all the capital outlays involved in expanding operations.
It’s also quick and simple – all you need is an IP Licence Agreement (we can help you draft one!).
This is a contract where you can specify what you are licensing, the licence fee, duration of licence and the scope of the licence.
And, you can be very specific on the terms and conditions of using your intellectual property.
But, there are risks.
When you “licence” your intellectual property, you may lose control over how others use your branding, which could impact your business altogether.
So, it’s important to make sure you have a solid IP Licence Agreement that specifies the purpose and scope of the licence.
Jeff runs a successful cafe in his local neighbourhood. He knows all his customers’ names and favourite orders, which is why the brand is so strong. The business is making a name for itself and so Jeff considers ways to scale without the expenses.
He decides to “licence” his brand out by letting different cafes in other neighbourhoods use his logo and business name in exchange for a licence fee.
What Is A Franchise?
A franchise is when you allow an independent business to operate using your business’ trading name and operating structure.
If you’re the franchisor, you’ll have more control over what the franchisee can do with your brand.
The terms of the franchising arrangements are typically set out in a Franchising Agreement and Operations Manual.
We recently wrote an article on Franchising Agreements and what they’re all about here.
There are also a number of other legal documents involved to help franchisors protect their brand and intellectual property.
- Franchise Instruction Sheet
- Disclosure Document
- IP Licence Agreement
- Confidentiality and Non-Compete Agreement
- …and more!
So, going down the franchise route might be a good idea, because you have more control over how your brand is used.
It’s also a better option because you can provide training, marketing assistance and the everyday know-hows of using your brand the way you want.
If you’re still stuck on franchising, the Australian Competition and Consumer Commission (ACCC) has detailed information here.
Let’s go back to Jeff. Instead of “licensing” his brand out to other local cafes, he decides to start franchising.
This means he allows other independent businesses to use his entire brand name and operating structure.
So, other local cafes would be using Jeff’s cafe brand while having different management.
But, Jeff controls how they use his brand through a number of legal documents to make sure that they only use his brand name in a way that aligns with what Jeff would want.
When Are You “Accidentally” Franchising?
You become an “accidental” franchisor when you think you’re just licensing IP, but the law deems that you are, in fact, franchising.
Franchising is definitely the better option for businesses who want to control and protect how their brand and intellectual property is being used.
It’s also a great way to diversify risk, grow your brand recognition and scale your small business.
But, with the number of legal documents involved, franchising can be quite expensive for small businesses.
So, many small business owners use an IP licensing model to expand while also minimising costs as much as possible.
But when this looks like franchising, you become an accidental franchisor and have breached the Franchising Code of Conduct.
Here are some features of a business that might make you “look” like you’re franchising:
- Providing operational and training support
- Exercising significant control over operations
- Overseeing a promotional or marketing plan
Put simply, if you are being more involved in the sale, service, promotion or distribution of the brand you are “licensing” – you are accidentally franchising.
The ACCC regulates the area of franchising and a breach of the Franchising Code of Conduct could result in a financial penalty of up to $63,000.
They have more information on how they investigate franchising misconduct here.
What To Take Away…
There is a very fine line between IP licensing and franchising.
So, it’s important to know the difference between the two.
And deciding which option is best for you will depend on the nature of your relationship with the other business who is using your intellectual property.
It will also depend on the extent to which you intend to exercise control of your brand.
If you’ve already decided whether you’d like to pursue an IP licensing model or franchise model, we can help you!
We have fixed-fee packages to assist you in getting started.
Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
If you’re still stuck – not a problem!
Let us know and we can arrange for a consultation with one of our specialist lawyers who can walk you through your next steps.
Feel free to reach out at firstname.lastname@example.org or 1800 730 617.
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