Are you looking to expand your business into a network? There are two main ways in which you can do so, franchising and licensing. Both provide opportunities to expand your brand’s reach and continue making money for your primary business. So how do you know which model is right for you? We unpack the key differences below.
With franchising, franchisors must satisfy particular legislative requirements. Whether or not your business model is a franchise system depends on several factors:
- Have you granted someone else the right to carry on your business under a strict system or marketing plan that you substantially determine or control?
- Is the business associated with a trade mark or symbol you own?
- Do you require the other person to pay you a range of fees to operate?
- Is there an oral, implied or written agreement?
- If you have answered yes to the above questions, then your business relationship will be a franchise.
Franchises are ideal business structures if you want to be able to have a high level of control over how others operate your business model. For example, you can set out the types of uniforms your franchisee’s employees must wear, what the fit out of the shop must look like and its location. But with great power, comes great responsibility, and you must have the capacity and finances to be able to initiate and run a business that requires this level of control and ongoing support to the franchisee. There are also strict requirements under the Franchise Code of Conduct that you must comply with, including providing the potential franchisees with a high level of information about franchising and your business in particular, and acting in good faith when dealing with franchisees before and after they enter into the franchise agreement.
Licensing involves fewer requirements in that unlike franchising, there is no specific legislation setting out how you can and cannot deal with a licensee. Licensing doesn’t have the same level of control, and the licensees determine their marketing system and the way they want to sell the products or services. In this arrangement, you would be licensing your intellectual property – so your business’ branding including trademarks and service requirements. The agreement would explicitly set out the following:
- What intellectual property they would licence from you;
- The fee for using the Intellectual Property;
- The duration for using the Intellectual Property; and
- How services are provided.
Although there is some level of control with licensing, there is no control over marketing, training programs, etc.
As you can see, the main difference between franchising and licensing is the level of control in each relationship and the legal requirements that franchisors and licensors must meet. Which best suits your needs depend on your business goals and how you see your business expanding. If you see selling the same product sold in the same way, nationwide, then perhaps you would be better to consider franchising. If you don’t want to have to monitor every business using your branding and are happy just to take a cut of the revenue, then licensing might be the best way to go for you.
It’s best to get legal and tax advice before embarking on either of these relationships to make sure it is going to be a viable business venture for you. Questions? Get in contact with our franchise lawyers or business structuring lawyers know.