With childcare waits in many Australian cities and towns reaching years rather than months, now is an opportune time to expand a childcare business. However, the way a business owner chooses to do so needs to meet their business needs and expectations. This article details the two most common ways of expanding a childcare business and the things a business owner should consider before choosing a particular way to grow.
Licensing and Franchising
Business owners often decide to expand and grow their business either by making a license or franchise agreement with another party. While a licence and franchise are similar, they nonetheless differ in some important ways. As they require different processes to set up, impose different legal obligations and involve different ongoing compliance requirements, all Childcare Business proprietors need to understand how a licence and franchise vary.
When a business owner (the licensor) grants a licence, they give another party (the licensee) the right to use and apply both their intellectual property and systems to sell goods or provide a service. Intellectual property includes branding, copyright and trademarks. Systems can include any system or process unique to the business. In the context of a childcare business, this could include a particular method of caring for children founded on a certain philosophy, just like Montessori schools have a special way of educating children. Licensing gives a licensor only a limited ability to place conditions on the right they grant to a licensee in a licence agreement.
A franchise is a commercial arrangement whereby a proprietor (the franchisor) grants another party (the franchisee) the right to use their trademark or trade name when supplying goods or providing services. The commercial arrangement is founded on contract – the franchise agreement. There are different types of franchise. A franchisor could grant a Product Franchise. This kind of franchise allows a franchisee to sell or make available the franchisor’s trademarked products within a carefully prescribed geographical area. Conversely, a Business Format Franchise gives a franchisee the right to sell goods or provide services identifiable by the franchisor’s trademark. This kind of franchise also allows the franchisee to use a particular business format and operating system including a marketing plan and strategy. Franchise agreements are complex legal documents and must accord with the Franchising Code of Conduct. The Australian Consumer and Competition Commission (ACCC) is the government agency responsible for monitoring compliance with the Code.
The fundamental difference between a license agreement and franchise agreement is the degree of control that a licensor or franchisor can exercise over their licensee or franchisee. Typically, franchisors have a greater amount of control than licensors. It is likely that if an agreement places restrictions on the way a party can sell goods or provide services and limits the way they can promote them, it is a franchise agreement. Similarly, franchise agreements can restrict those other goods that a franchisee may sell and imposes on them certain record keeping obligations. The franchisor typically retains the right to review and monitor these records. Unlike a licensor and licensee, a franchise agreement will also provide for common marketing and systems.
It is not always obvious at first glance whether an agreement is a franchise or license agreement. In Rafferty v Madgwicks, the full court of the Federal Court held that the defining characteristic of a franchise agreement was its provision for a ‘system or marketing plan’. Indications of a system or marketing plan include the right for a business to approve the promotional and advertising material of another and to audit their books and accounts. However, the court stressed that much would depend on the facts of a particular case. Irrespective of whether an agreement is titled license or franchise agreement, the document must be in fact what it asserts it is. There are negative implications for a business if a licence agreement is, in reality, a franchise agreement.
Implications for Childcare Business Proprietors
If a childcare business is considering expanding, they need to think carefully about the degree of control and involvement it wishes to have with the other business. Important questions include:
- Do you want to implement systems?
- Would you like common marketing?
- Would you like to monitor and regulate performance?
- How much interaction do you envisage between businesses?
- Have you considered the legal implications of both kinds of agreements?
There can never be one, correct answer. There is only a right answer for a particular business. However, regardless of how a commercial entity chooses to expand, it will need professional guidance and assistance to ensure that it meets all applicable legal obligations and understands its ongoing compliance requirements.
LegalVision has helped many businesses with their franchising and licencing needs. Contact us today on 1300 544 755 or fill in the below form.