Franchising isn’t the only option to grow your business! You can also license others to use your brand. Whether you should franchise or license your business largely depends on the amount of control you wish to have over your business network and the level of ongoing responsibilities you are willing to commit to.
A licence agreement is a contract which involves a business (the licensor) giving another person or company (the licensee) the right to use something it owns (such as a trade mark, or a particular product or service).
These licences often don’t contain detailed requirements and stipulations regarding how the licensee should operate the business. These licences simply give the licensee the right to use the brand for a fee with little in the way of guidance and compliance requirements regarding how the business should operate under the brand.
By contrast, a franchisor exercises a significantly greater level of control over franchisees than a licensor.
Franchise agreements contain clear directions on how the franchisee must operate the business and give detailed specifications on the level and type of marketing that each franchisee must carry out when selling to customers.
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Key Characteristics of a Franchise and a Licence
|Marketing||Common marketing plan for all franchisees||Licensees determine their own marketing activities|
|Systems||The franchisor dictates the exact methods and systems (such as uniforms, fit-out and location) to be adopted by the franchisee||Licensees are free to develop their own system for operating their business (e.g. fitting out their storefront as they please)|
|Performance Monitoring||The franchisor monitors performance, such as through stipulating minimum performance criteria/quotas||No requirement to comply with performance criteria|
|Fees||Franchisees pay certain fees, which could include payments to a marketing fund||Licensees pay certain fees. The licensor does not operate a marketing fund|
|Intellectual Property||Franchisees use the trade marks and intellectual property of the franchisor||Licensees use the trade marks and intellectual property of the licensor|
Although a franchise system provides you with a much greater level of control than a licence, it also comes with greater ongoing obligations as franchisor (such as annual financial reporting and support and training of franchisees).
If you opt for a licence agreement, keep it simple. It’s tempting to include clauses in your contract relating to the branding and appearance of the licensee’s business. However, doing so risks bringing your licence agreement into the realm of a franchise. The Franchise Code of Conduct (the Code) sets out specific elements that must exist for a particular arrangement to be considered a franchise. If those elements exist, you will have a franchise agreement, even if that is not what you intended. You should speak to a lawyer to understand whether your arrangement is a franchise or a licence as each arrangement differs in terms of legal obligations and level of control.