Franchise or License Agreement

[ which one is right for you? ]
by Hans Nimb Published

If you are considering expanding your business or the reach of your product, now is the time to weigh up whether a franchise or license agreement will be the best model to move forward with. The easiest way to determine which option is right for you comes down to your level of involvement. Below are our top three considerations which will make it clear which option is right for you.

Consideration 1 – Control 

  • If you want to dictate the operation system and blueprint for the business to follow, you will likely have a franchise.
  • In order to protect the interests of both parties, all franchise agreements must comply with the Franchise Code of Conduct (Code). The Code contains strict rules and obligations that must be complied with by both parties. Your franchise agreement can detail your branding, uniforms that people must wear, style of fit out of locations and even the location that franchisees can operate out of.
  • If this level of involvement does not interest you then you should consider a license agreement. An example within the IT space would be a software developer who has developed a security program that enters into a license agreement with a larger software company. The larger software company then goes on create a whole software program for businesses that includes the security program. Because the agreement is simply to use the security software, the larger company does not have to follow any particular type of business plan.

Takeaway 1 – if you want to control the manner in which someone conducts the business, you will likely have a franchise and you must comply with the Code.

Consideration 2 - Fees / Marketing 

  • If there is a common marketing plan for multiple businesses you may have a franchise.
  • How you want fees to be used will also indicate which direction you are moving towards. Both agreements are likely to have joining fees and periodic membership/subscription fees. However, a big point of difference is marketing. Marketing is critical to franchise agreements and almost every agreement will have a contribution to a marketing fund. The reason being that when you come up with a new marketing strategy, you will want all franchisees to follow suit. This means that you will need to pay for new promotional materials to be distributed to your franchisees. This is where a marketing fund will become vital for your business otherwise you will need to find another way to fund your marketing strategy. For example, whenever you see a poster in a gym promoting “summer membership specials” or in a coffee shop promoting a new product, the franchisor would have paid for that material out of the marketing fund. The idea being that everyone is promoting the same thing and hopefully benefiting from the consistent messaging of the product.
  • This is in contrast to a license agreement which will often not have a uniform marketing plan or even factor in marketing at all. To continue the example of the software developer, there would be no need for marketing as the agreement is to provide exclusive use of the security program. The larger software company will conduct its own marketing strategy for the complete product.

Takeaway 2 – If you have a marketing strategy for how best to expand the reach of your product and want to ensure that anyone associated with selling your product follows that strategy then you are looking at a franchise model and you must comply with the Code.

Consideration 3 – Image / Trademark

  • If you demand that another party must use your intellectual property (e.g. trade marks) in delivering its services and products you will likely have a franchise.
  • It is important to note that a license agreement can also grant the licensee a right to the licensor’s intellectual property. However, it is not essential to a license agreement. Especially if the agreement is similar to that of our example of the software developer.

Takeaway 3 – If an image or Trademark in not provided it is very unlikely that you will have a franchise model. However, both a franchise model and a license utilise the grant of an intellectual property right. Whether or not that right amounts to a franchise will usually be determined by Consideration 1 and Consideration 2.

Conclusion

It is important to note that regardless of you entering into a license agreement, if your business model appears to be a franchise agreement, it will be deemed a franchise agreement by the ACCC (Australian Competition and Consumer Commission). This means that you will then need to comply with the Code. This is why it is important to understand the differences between the agreements and what will be best for your product.

If you are unsure which direction you want your product to go, feel free to give us a call on 073193 3000 to discuss your options.


General Advice Disclaimer

Information provided on this website is general in nature and does not constitute financial or legal advice. Every effort has been made to ensure that the information provided is accurate, but information may become outdated as legislation and new government announcements are made. Individuals must not rely on this information to make a financial, investment or legal decision as it does not take into account their personal circumstance. Before making any decision, we recommend you consult a licensed adviser or legal practitioner to take into account your particular objectives, circumstances and individual needs.

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