Growing your business through Licensing or Franchising

by | Dec 15, 2020 | Business Sellers & Purchasers, Commercial Clients, Start-Up & Expanding Businesses, Tradie Businesses

Now is a really great time to think about branching out through franchising or licensing your already successful business model. Many of the people who are unfortunately made redundant when the Government stimulus finishes will be looking to buy ‘a job’ and low investment franchise or license businesses will be an attractive proposition.

If you want to make more money from your business and brand and are seriously thinking about growing your business, you may choose to license and not franchise because people have told you it is cheaper and easier.  It is, but don’t get caught out by setting up a license business model when it could in fact be a franchise by default. It may be cheaper and easier to set a license model but serious consequences can apply to those who mistakenly or purposefully dress up a franchise as a license.

Here are some key differences you need to know to steer clear of trouble.

What is the Difference between a Licence and a Franchise?

It really all comes down to how much control you want to retain. While the models are often considered to be similar, they follow very different control structures, with different fees and regulations involved.

License Agreements

A license agreement generally gives the ‘Licensee’ (the person who buys the rights to use your brand) the right to your intellectual property (trademarks, designs, or technology), to use in the Licensee’s own ventures. It is traditionally a hands-off approach in terms of what a Licensor can control in terms of the Licensee’s business operations. There are no performance criteria to report back to the Licensor. It also avoids many of the formalities and costs involved with franchising.

An example of this is a business program software that is licensed out to other smaller businesses. The Licensor only has control over the intellectual property, not the overall running of the Licensees business operations.

Franchise Agreements

A franchise agreement allows someone the right to operate under an already existing brand and will set out systems and rules that the Franchisee must abide by. The Franchisor possesses much more control over the Franchisee’s business than in a license agreement. This includes control over what goods and services are sold, marketing plans, advertising, branding, training, operating systems, shop fit-outs, uniforms, and more. A Franchisor will also monitor the Franchisee’s performance and has the right to audit records and accounts. There are also stricter regulations in place for franchise agreements. If your business model meets the following criteria you are running a franchise business and you will need to make sure you are in compliance with the ACCC’s Franchise Code of Conduct by ensuring:

You have an agreement, written, oral, or implied

You have granted to another person the right to conduct a business offering, supplying, or distributing goods or services under a system or marketing plan substantially determined, controlled, or suggested by you. The business will be substantially or materially associated with a trademark, advertising, or a commercial symbol owned, used, or licensed by you or specified by you
Before starting (or continuing) the business, the Franchisee must pay or agree to pay the Franchisor a fee. The fee can include initial capital investment, payment for goods or services, or a royalty fee. It excludes payments for goods or services supplied on a genuine wholesale basis or repayment of a loan.

An example of this is Jim’s Group. Jim’s Group provides a two-week training course, operating systems, ongoing support, and most importantly the use of the established brand name. In exchange, the Franchisee puts up the initial capital, pays license fees, and strictly adheres to the business processes as set out in the operating manual. This includes acquiring Jim’s identifiable logo.
Consequences

People think it’s easier and cheaper to license, however, if you get it wrong you could be exposing your business to hefty fines. Failure to comply with a penalty provision in the Franchising Code could result in the ACCC taking court action seeking a financial penalty, or issuing an infringement notice for the breach.

Avoid facing penalties for non-compliance by being able to detect when your licensing agreement is so closely linked to a franchise agreement that it blurs the line between the two.

Helen Kay

If you require any assistance with your business legals or any other commercial legal issue, please do not hesitate to contact me.

P: 1300 064 707 | E: helen.kay@riselegal.com.au

Typical Legal Disclaimer!…

Unfortunately, there is never a ‘one size fits all’ formula to apply. Every situation is unique and it can be tricky to wrap your head around some areas of the law. To ensure you are setting yourself and your business up for success, it is always best to consult a legal professional with expertise in the field.

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