At Coleman Greig, we are often asked by clients "What is
the difference between licensing and franchising?"
Generally speaking, licensing and franchising both deal with
the selling of certain intellectual properties to third parties
such as software, trademark, or a business
process. Franchising however has a greater deal of control by
the franchisor than a license.
A franchise always includes a license of the brand and
operating methods, along with assistance (such as training and an
Operations Manual) or support (providing advice, quality control,
inspections etc).
The Franchising Code defines a franchise agreement as an
agreement, either written, verbal or implied, that has the
following characteristics:
- one party (the franchisor) grants another party (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services under a specific system or marketing plan;
- the franchise business will be substantially or materially associated with a trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor; and
- the franchisee is required to pay, or agree to pay, a fee to the franchisor before starting or continuing the business.
Simply because a business is called a license does not mean it
cannot be a franchise. If a license meets the above
definition, it is most likely a franchise and must comply with the
Code.
Licensing on the other hand is a business structure and method
of distributing goods and services. In most cases, the licensee
does not retain rights to use the company's trademark; does not
have exclusive territorial rights; and does not receive training or
ongoing support from the licensing company. The licensor is
often free to sell similar licenses and products to other people in
the same geographic area.
Whilst license opportunities are often less expensive than
franchises - in both the upfront investment and ongoing fees - the
major negative aspect of licensing is a lack of control over
licensees to get them to follow crucial systems such as sales
techniques. Whether you chose to license or franchise, you
need to understand your obligations as a Franchisor/Licensor or
Franchisee/Licensee under both systems.
For expert advice on the pros and cons of each business structure and which may be more appropriate in your situation, speak to one of Coleman Greig's experienced commercial lawyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.