Given that the cleaning industry in Australia is worth approximately $4 billion each year, owners of cleaning businesses may consider expanding their business. However, every cleaning business owner needs to do so in a manner best suited to their needs and growth plans. This article outlines two of the most popular ways to expand a cleaning commercial enterprise and the factors business owners need to think about before selecting between them.
Licensing and Franchising
When a business entity grants a licence to another party, they give this party the right to use and apply the intellectual property associated with their business to sell goods or provide services. This property includes their branding, copyright and trade marks as well as any systems unique to the business. So, if a cleaning business has a particular process and system for dusting that is particularly effective for asthmatics and those with allergies (and advertised as such), a licence would ordinarily grant a licensee the right to use and apply that system. The party that grants a licence is called the licensor. The recipient is known as the licensee. A licence relationship requires a licence agreement. As a general rule, licensors have less ability to place conditions on how a licensee utilises the right inherent in the agreement.
In contrast, an business enters into a franchise relationship when it gives another party the right to use their trademark or trade name to supply goods or provide services. Franchise relationships require a franchise agreement. These agreements are complex and require a franchisee, among other things, to make regular payments to the franchisor. They must conform to the Franchising Code of Conduct. The Australian Competition and Consumer Commission monitors compliance with the code and can issue financial penalties and infringement notices for breaches of it. The business that grants a franchise right is the franchisor. The party who pays to receive it is the franchisee.
While it is common to speak of a franchise singular, there are in fact different types of franchise. A Product Franchise allows a franchisee to sell or make available the franchisor’s trademarked goods within a particular geographical area. Alternatively, a Business Format Franchise allows a franchisee to sell products or provide services that are identifiable by the franchisor’s trademark. The franchisor also allows the franchisee to use their comprehensive business format, including a marketing plan and strategy.
The fundamental difference between a license and franchise arrangement is the extent of the control that one business exerts over the other. In general, franchisors have more control than licensors. Franchisors often mandate that franchisees follow set processes and procedures when selling goods or providing services. Moreover, franchise agreements restrict how franchisees sell goods and services and prescribe how they must market them. They limit what other products franchisees can sell and oblige franchisees to follow particular account and record keeping procedures. Franchisors also have the right to inspect and monitor the financial records of franchisees.
However, it can be difficult at times to delineate a franchise agreement from its license counterpart. The full court of the Federal Court faced this issue in the case of Rafferty v Madgwicks. The case concerned misleading and deceptive conduct as well as breaches of the Franchising Code of Conduct. In its judgment, the court noted that while differentiating these two types of agreements primarily rests on the facts of a case, an important indicator of a franchise relationship is the existence of a system or marketing plan. The system or marketing plan takes shape in many ways including control of the use of the brand and trading name as well as the need for franchisees to report turnover and profit.
Considerations for Cleaning Business Owners
Any cleaning business owner contemplating expansion through licensing or franchising must consider how much control they wish to have over another business. Key questions to ask include:
- Do I wish to implement systems?
- Do I want common marketing?
- Would I like to monitor and regulate performance?
- How much interaction do I envisage between the businesses?
- Have I thought about the legal implications of both types of agreements?
There is never one, right answer. There is only the right answer for a particular cleaning business. Nevertheless, howsoever an entity chooses to expand, it will need professional legal assistance. A professional can help it understand the ongoing compliance obligations of both kinds of relationships and ensure that any agreement complies with all applicable laws. It is of primary importance that the substance of an agreement matches its nomenclature. There are adverse consequences for licence agreements that are, in reality, franchising arrangements.
LegalVision has helped many businesses with their franchising and licensing needs. Contact us today on 1300 544 755 or fill in the below form.