There are many different options for expanding your business and brand. Two of these include a franchise or licence business model. Whether you should franchise or license your business largely depends on the amount of control you wish to have over your business. It also depends on the level of ongoing responsibilities that you are willing to commit to. This article will walk through the critical aspects of franchising and licencing to help you understand which model will best suit your business. 

Key Characteristics of a Franchise Model

A franchise business model will usually involve you:

  • controlling how the franchises will operate; 
  • determining what the business looks like; and 
  • managing the promotion of different franchises through marketing. 

When you bring a franchisee on board, you will need to give them an operations manual, which explains the runnings of your business. An operations manual will detail: 

  • how the company should operate;
  • what uniforms need to be worn;
  • what the opening hours will be;
  • which systems they will use to process new customers or clients; and
  • what the store fitout will be. 

For example, McDonalds’ franchises all share:

  • a very similar fitout; 
  • the same uniforms; and
  • the same menu items. 

This is so that it doesn’t matter which McDonald’s you go to, you will recognise the brand and have a similar experience across stores.

With more control over your franchise network, comes more regulation. The Franchising Code of Conduct (the Code) outlines the rules that franchisors must follow when it comes to operating a franchise. Some of the critical parts include: 

  • your obligation to act in good faith;
  • what a disclosure document must contain; and 
  • how disputes are to be resolved between franchisors and franchisees. 

The Code outlines your obligations extensively. It is therefore important to consider these rules and understand that although you will have more control over your business, you will also need to follow more regulations.

The Ultimate Guide to Setting Up a Franchise

Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.

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Key Characteristics of a Licence Model

A licence model involves significantly less control over your licensees than a franchise model. The primary focus of a licence arrangement is to allow a licensee to use your trade marks and other intellectual property without having to comply with a particular marketing or operating guideline. This gives provides you with a broader market reach and the licensees can benefit from not having to build a brand from scratch. However, there could well be inconsistencies between stores if licensees choose difference business methods to deliver your products or services. 

For example, at Crossfit gyms, potential licensees can become ‘affiliates’ of the business. After they are approved, they can use Crossfit’s intellectual property. Beyond this, Crossfit does not mandate:

  • training regimes;
  • fit-outs; or 
  • uniforms. 

This model is definitely attractive if you have a simple business and are looking to expand quickly. Difficulties can arise, however, as this lack of control means that the licensees could damage your brand. Marketing is also left to the licensees to decide, so you have little power over quality control after you have provided the licence. 

The Key Differences Between a Franchise and Licence

Franchise Licence
Fees  Franchisees will pay fees to you to cover expenses. Alternatively, you could set a percentage of their profit that they must provide you. Licensees must also pay a fee to you to utilise your business’ branding and intellectual property. However, they will usually pay lower fees than a franchisee would.
Marketing As a franchisor, you will usually have control over all marketing. Part of the franchise fees will cover this. Marketing is left up to the licensee to organise. This means that you don’t have much control over the messaging that individual licensees may decide to use. 
Systems  The franchisee will determine the exact systems that will be used within the business. This could include things like: 

  • which uniform must be worn;
  • how the shop fit out should look; and 
  • how the till system will work. 

Licensees are allowed to choose their own fit out.

For example, Crossfit gyms have many different types of fit-outs, but all share the same branding and logo. There is no shared system for centralised payments or processes. 

Performance Monitoring As franchisor, you will monitor the performance of franchises and can require certain minimum performance criteria. You can also offer awards to high performing franchisees.  You will not monitor licensees as closely and there are usually no requirements to perform to a certain standard. 
Intellectual Property  Both franchisees and licensees will use your business’ branding and trade marks. However, within franchise models, you won’t just be providing your intellectual property to the franchisee, but mandating how they can use it.

 

What Are the Risks of Accidentally Becoming a Franchisor? 

If the business model you are operating fits the definition of a franchise, regardless of whether you call it a licence, you will have to comply with regulations under the Code. There are harsh penalties for operating as a franchise but not complying with the Code. 

Whether you are a franchisor or licensee will usually come down to the amount of control you have over the different business locations. Even if you just make suggestions about marketing or how to operate or the systems within a licence, you could be found to be running a franchise. Therefore, you should ensure that you are not providing a high level of control over your licensees if you plan to run this model.

Key Takeaways

Before you launch into franchising or licensing, it is important to set out how you would like the business model to work. If you wish to maintain a high level of control over the product and marketing, franchising is probably for you. Alternatively, if you wish to take a step back while your business expands, a licence model might be best. If you have any questions about licensing or franchising your business, contact LegalVision’s franchise lawyers on 1300 544 755 for a fixed fee quote or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Silje Andersen-Cooke

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