If your business is hoping to grow, you might be considering expanding by letting other people use your brand in one way or another. A common question business owners ask is, “Should I choose franchising or licensing?”
Franchises and licences are similar in that you’re giving someone legal permission to use something that belongs to you. However, there are some significant differences you need to be aware of so you can choose a model that is suited to your business structure and long term goals.
Franchise Agreement vs Licence Agreement
Licence Agreements and Franchise Agreements both generally grant people the right to use someone else’s intellectual property within a defined territory.
All Franchise Agreements include a licence, but not every Licence Agreement is for a franchise.
Well how do you tell them apart?
In Australia, it’s a little easier to distinguish them as all Franchise Agreements are governed by the Franchising Code of Conduct (the Code). The Code tells us 4 criteria you must meet for there to be a Franchising Agreement.
- There is a written, verbal or implied agreement.
- One party pays or agrees to pay the grantor (usually a franchisor) a fee. The fee can include an initial capital investment, payment for goods or services, or a royalty fee.
- One party (franchisor) grants to another party the right to run a business by supplying or distributing goods or services under a heavily controlled plan.
- The business will be associated with a trademark, advertising or a commercial symbol owned, used or licensed by the franchisor or specified by the franchisor
So, all four of these conditions must be met to be a franchise. Most licenses however, will also involve the first two criteria.
Let’s dive into more detail about franchises and licences for a better understanding of the difference.
What Is Franchising?
Franchising is when a business (the franchisor) gives another party (the franchisee) the right to conduct business under the franchisor’s trading name. This means that the franchisee can be set up in a different location and as a separate branch, but it will all be under the rules and structure of the franchisor’s brand.
Technically the franchisee can run the business, but the franchisor will still control the way they do things (for example, the franchisee needs to advertise the products a certain way).
So, you can see why this kind of setup reels in a lot of paperwork.
McDonalds is a well known franchisor, and they have thousands of branches run by franchisees up under the franchisor’s name. However, McDonald’s will have specific rules about how their franchise stores have to be run, like uniforms, menu and procedures.
What Is In A Franchising Agreement?
If you’re franchising, the first and most important document you need to have is a Franchise Agreement. This will set out the roles and obligations of the franchisor and franchisee, and the terms should be unique to your business relationship.
It should cover things like:
- The key terms of the business
- All relevant procedures
- Non-compete clauses
- Training and support
- How long the business relationship will last
- Payment of royalties to the franchisor
- Renewal and sale rights
- Termination clause (you could also cover rules around renewing or extending the agreement)
You’ll also need other documents, such as:
- Disclosure Document (franchisors have a number of disclosure obligations – we’ll cover this shortly)
- Confidentiality and Restraint of Trade Annexure
- Deed of Prior Representations
These documents need to be carefully drafted as it will stabilise the business relationship from the outset. We’ve written more about the documents you’ll need in a Franchise Agreement here.
What Is A Licence?
A Licence Agreement is a contract that allows you to use the property of another person or business. For instance an Intellectual Property licence would allow you to use another’s IP (like logos, brand or trademark) as part of your business. However, it’s only a right to use the IP and not own it.
In addition, licensees may not be required to follow certain procedures or marketing plans in relation to the use of that property (this is the case with franchises!).
You might’ve walked into H&M and come across shirts with Disney characters on them. H&M has a Licence Agreement to use Disney’s IP as part of their clothing. However, this doesn’t mean they’re operating as Disney nor own any of Disney’s character designs.
What Is In A Licence Agreement?
A Licence Agreement should cover the following things:
- The scope of the property being licensed
- The licensor and licensee
- The purpose for using the property
- Confidentiality terms
- Exclusivity (where is it being licensed?)
- Payments or royalties
- Any rights to transfer
What’s The Main Difference?
So after going through the above, you might have noticed that a Licence Agreement is a little less complex than a Franchise Agreement. This is because a Licence Agreement doesn’t involve as much control on the licensor’s part. After all, they aren’t really using your entire brand, just some of your property (according to what is in your Agreement).
In other words, a licensor will tell the licensee what property they can use and to what extent, but how the licensee sells and markets that property is completely up to them! If you want to monetise your IP without the added responsibility of managing an entire franchise, then licensing might be the better option for you.
This is quite different to a Franchise Agreement, which involves adherence to certain systems and strict compliance with the Franchising Code.
If you’re still unsure, consider the following table of key differences between the two.
|Feature||Franchise Agreement||Licence Agreement|
|Level Of Control||The franchisee will have control over systems and procedures within each branch. For example, uniforms, safety procedures and equipment.||The licensor does not dictate what systems to use. The licensee has freedom over how they use the property subject to the Agreement.|
|Marketing Plan||The franchisor will generally control the marketing side of things (this can be covered by franchise fees).||The licensee can market their products as they wish.|
|Performance||Franchisors will need to monitor franchisees’ performance so they can reward them accordingly. Generally, there will be a set criteria for this.||There is no need to monitor licensees due to the limited control over their activities.|
|Payment||Franchisees need to pay franchisors for using their property. In some cases, franchisees could pay a percentage of their profit to franchisors.||Licensees also pay licensors for using their property, but generally speaking, it is lower than that of a franchise.|
I Accidentally Entered Into A Franchise Agreement – What Now?
Believe it or not, accidental franchising is a thing! If you initially thought you were in a Licence Agreement, but later find out that you are actually in a Franchise Agreement, this can have some heavy implications. Why?
Franchise relationships are heavily regulated. The Franchising Code ensures that all franchisors and franchisees are kept in check.
For example, new franchising agreements usually include a 7 day cooling-off period, which basically allows you to back out of the agreement within that time. In general, most other contracts are not required to have a cooling-off period. So, if you believed that you were in a Licence Agreement, this means you may have unintentionally foregone or even breached a number of franchising protections or obligations.
If any of the provisions in the Code are breached by either party, this can be enforced by the ACCC and things can get tricky from there. If this is the case, it’s important to speak to a lawyer.
Franchise Agreements can also get quite messy when they’re about to end. For example, if a franchisor wants to end the relationship but did not give adequate notice (according to the Code’s provisions), this can lead to a dispute. We’ve written about what usually happens at the end of a Franchise Agreement here.
If you’re not sure whether you’re under a Licence or Franchise Agreement, it’s best to speak to a lawyer to get the right documents ready. Being a franchisor or franchisee has a number of obligations that are heavily enforced, so you want to make sure you’re compliant.
If you’re a business owner who’s still looking at their options, we have a team of friendly lawyers who can help you decide. Whether it be drafting a Franchise Agreement or informing you of your obligations under the Code, Sprintlaw has the resources.
You can reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for an obligation-free chat.
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