What is the Difference Between a Licence and Franchise Agreement?

In Short

• A licence agreement lets another party use your intellectual property with fewer operational controls.

• A franchise agreement involves more control over how the business is run and is regulated by the Franchising Code of Conduct.

• Misclassifying a franchise as a licence can lead to serious legal obligations and penalties.

Tips for Businesses
If you want to expand using a licence, avoid controlling your licensees’ day-to-day operations or marketing. If you impose detailed systems, you may unintentionally create a franchise, which requires compliance with the Franchising Code. Always seek legal advice to choose the best model for your business.

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Table of Contents

• What is a Licence Agreement? 
• What is a Franchise Agreement?
• Am I a Franchisor? 
• Risks of Becoming an “Accidental Franchisor”
• How Does the Code Apply?
• What if I Breach the Code? 
• How Do I Avoid Becoming an ‘Accidental Franchisor’?
• Differences Between a Licence and Franchise Agreement 
• Key Takeaways 
• Frequently Asked Questions

If you want to expand your business, consider adopting a franchise or a licence model. Each model has advantages and disadvantages in offering an effective business expansion strategy. However, understanding their differences is the key consideration in determining the best model for you. This article will explain the differences between a licence and a franchise agreement.

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What is a Licence Agreement? 

A licence agreement is a contract whereby you (the licensor) give another person or company (the licensee) the right to use something. This kind of licence arrangement can apply in several different scenarios. For example, your licence can range from the right to use a specific product or intellectual property. Indeed, a typical arrangement in business expansion is an intellectual property licence that gives the licensee the rights to use the following:

• brand; 
• logo;
• trade mark;
• copyright;
• know-how; 
• trade secrets; or
• any other type of intellectual property that the licensor owns. 

Ultimately, the scope or breadth of the intellectual property licence will depend on the licence’s drafting and commercial terms.

For example, imagine you have developed a unique software application for project management. Instead of selling the software directly to end-users, you might decide to license it to other businesses. In this case, you could enter into a licence agreement with these businesses, allowing them to use your software within their organisations. The licence agreement would permit them to use your intellectual property (the software) for a specific purpose and under certain conditions. This could be for limiting the number of users or restricting its use to a particular geographic region

What is a Franchise Agreement?

Ultimately, a franchise agreement is a licence agreement. However, it is essentially a licence agreement meeting certain statutory criteria.

In Australia, the definition of a franchise agreement is captured in legislation known as the Franchising Code of Conduct (the Code). One of the most distinguishing features between a licence and a franchise agreement is that a franchisor exercises greater control over the franchisee than a licensor. This is one of the criteria outlined in the definition of a franchise agreement as specified in the Code.

Indeed, unlike a licence agreement, franchise agreements will typically contain specific directions on how the franchise operates. This will often involve detailed specifications on the level and marketing that the franchisee must conduct. 

Some useful indicia to determine whether an agreement is a franchise agreement per the Code are as follows:

• there is some form of agreement between you and the franchisee in writing, verbal or implied from the circumstances;
• you grant the franchisee or licensee the right to carry on a business;
• you implement a system and marketing plan for the business;
• if you implement a system or marketing plan, whether you substantially determine, control or suggest the systems and marketing plan that govern the franchise operations;
• whether the business operates using a specific symbol or trade mark and, if so, whether you own the said symbol or trade mark; and
• whether you charge an initial fee as well as ongoing royalty fees.

If your agreement fits some of the above criteria, you are likely operating a franchise agreement and should seek further advice. Regardless of whether you refer to your document as another type of agreement, it can still be a franchise agreement and require compliance under the Code. For example, particular distribution and shareholder agreements may be classified as franchise agreements if they meet the definitions in the Code.

Am I a Franchisor? 

While the above criteria are a good way of determining whether your arrangement is a franchise, understanding your responsibilities may be challenging. For example, you may question how you would assess whether you ‘substantially’ control the system or marketing plan of the business.

The system or marketing plan you impose may indicate a franchise agreement if you:

• have a broad right to audit the franchisee’s records and accounts beyond simply calculating sales;
• require the franchisee to obtain your approval on advertising;
• provide mandatory training in selling the goods or services;
• implement uniforms;
• suggest retail prices for the sale of goods or services;
• stipulate the methods for running the business on a day-to-day basis;
• restrict the franchisee from selling competing goods or services; and 
• require that the franchisee only sell your goods or services. 

The level of control or ability to make suggestions regarding any of the above matters likely indicates that you are operating as a franchisor in a franchise system. 

Risks of Becoming an “Accidental Franchisor”

If a licence agreement or any similar agreement has the characteristics of a franchise agreement under the Code, it will be considered a franchise agreement. Therefore, the Code will regulate your agreement and impose several obligations on you that you must comply with. These obligations apply irrespective of what is in your control or what you have agreed upon with the party using your brand. Failure to comply with the Code’s requirements can result in significant penalties. Below we list some of the obligations under the Code.

How Does the Code Apply?

The Code further mandates and prescribes the nature of your relationship with the franchisee, including: 

• cooling off periods; 
• dispute resolution; 
• acting in good faith; and 
• the disclosure of certain information. 

What if I Breach the Code? 

The ACCC may impose significant penalties for breaches of the Code. This includes, for example, a failure to comply with good faith or the required procedures for terminating a franchisee. 

How Do I Avoid Becoming an ‘Accidental Franchisor’?

If you wish to operate a licence model rather than a franchise, you must be aware of how to avoid operating what is actually a franchise. Some steps you can take to avoid this label are to:

1. Consider allowing your licensee to trade under your brand or another brand as part of their business operations. This means their business may not be substantially associated with your trademark if only aspects are under your brand.
2. Ensure that any training you provide to licensees does not prescribe how their business needs to operate on a day-to-day level, or otherwise impose or suggest specific systems. This level of operational control, whether through direct contact or an operations manual, is a hallmark of the franchisor-franchisee relationship.
3. Avoid setting standards or performance benchmarks that licensees need to comply with. Whilst you can set out restrictions on anything that may damage your brand or reputation, the delivery of services or sale of products should be mostly left up to the licensee.

Differences Between a Licence and Franchise Agreement 

It is not uncommon for licenses to be mistaken for franchise agreements, but, as noted above, this can have significant consequences. The table below summarises the main differences between the two forms of arrangement.

Keep in mind that franchise networks often include licences to their intellectual property as a part of the franchise agreement. This allows your franchisee to utilise your branding and other intellectual property rights to run the business effectively. For example, if you were a franchisor for a consumer electronics business, you would need to grant your franchisees a licence to use your branding. 

Key Takeaways 

Whether you choose to franchise or license your brand ultimately depends on the level of control and ongoing responsibilities you prefer to have. It would be helpful to consider that while operating a franchise provides you with greater control, it also involves more responsibility. If you choose to license your business, ensure that the licence does not impose requirements similar to those of a franchise.

If you would like to license or franchise your business, our franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What’s the difference between a franchise and a licence?
A franchise is a type of licence agreement that meets specific criteria under the Franchising Code of Conduct, including greater control over how the business is run. A licence is generally more flexible and allows the licensee to use your intellectual property without strict operational rules.

When does a licence agreement become a franchise?
If you control how the other business operates — such as how it markets itself, the systems it uses, or the branding — you may have created a franchise arrangement under the law, even if you call it a licence.