When expanding your gym, gym business owners need to be sure that they grow the business with the right structure in place. This article details two common ways to expand a commercial entity and the questions to ask when choosing one or the other.
Licensing and Franchising
Many businesses expand by licensing or franchising. While these terms might be used interchangeably in conversation, they are distinct legal concepts.
If a business owner grants a person a licence, they give them the right to use and apply their entity’s intellectual property to sell goods or provide a service. This right includes branding, copyright and trade marks. It also encompasses business systems. For example, if your gym business has a unique fitness method or system, a licensee has the right to use that particular process. A licensor has a limited ability to impose conditions on these rights, and all licence arrangements require a licence agreement.
Conversely, when a proprietor (the franchisor) franchises their business, they enter into a contract with another party (the franchisee). The agreement gives the franchisee the right to use the franchisors’ trade name and trade mark in connection with the supply of goods or provision of services. There are various types of franchises including product franchising and business format franchising. A product franchise allows a party to sell or make available the franchisor’s trademarked goods in a delineated geographical area. A business format franchise grants the right to sell products or provide services identified with the franchisor’s trademark as well as use a detailed business format and operating system including marketing plan and strategy. A franchise agreement is a complex and detailed legal document. It must also comply with the Franchising Code of Conduct. The Australian Consumer and Competition Commission (ACCC) is responsible for monitoring compliance with the Code.
Differences between Licensing and Franchising
The most significant difference between licensing and franchising concerns the level of control that a licensor or franchisor exerts over their licensee or franchisee. Licensees typically have less control of, and less ability to impose conditions on, a franchisee. In contrast, franchisors have a much greater degree of control. It is probable that a franchise agreement will restrict how franchisees sell and promote goods or services. Franchisors can limit a franchisees’ right to sell other products and impose particular account and record keeping obligations on a franchisee. In a franchise arrangement, both franchisor and franchisee typically have a joint marketing plan or system.
Of course, it is not always easy to tell if a particular agreement grants a license or franchise. In the case of Rafferty v Madgwicks, the full court of the Federal Court asserted while any characterisation of an agreement as either a licence or franchise arrangement will depend on facts if the agreement makes provision for a ‘system or marketing plan’ it is more likely a franchise agreement. It is essential that all licence and franchise agreements are what they say they are. Setting up a franchise or licence involves different legal processes, regulations and imposes different ongoing compliance requirements. There are negative implications if an agreement is, in fact, a licence or franchise agreement but assumes the title and obligations of the other.
Considerations for Gym Business Owners
When you are considering how to expand, you must think carefully about how much control you would like over another party who uses your intellectual property. Some key questions include:
- Do you want to implement systems?
- Would you prefer common marketing?
- Would you like to monitor and regulate performance?
- How much interaction would you like between businesses?
- Have you considered the legal implications of both options?
There is no right answer – you should seek legal advice to make sure you meet your legal obligations and understand ongoing compliance. LegalVision has helped many businesses with their franchising and licensing needs. Contact us today on 1300 544 755 or fill in the below form.