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Do you have exciting plans to establish a network of businesses, but are wondering how to achieve them? You might want to consider setting up a licence or franchise business model. This article explains the key differences between a licence and franchise agreement.
What is a Licence Agreement?
A licence agreement is a contract where one party (the licensor) gives another party (the licensee) the right to use their property. This may include the right to:
- use the licensor’s intellectual property (IP);
- handle the licensor’s specific programs or products; or
- trade under their licensor’s brand name or logo.
Importantly, licensors do not give licensees a comprehensive marketing or operations manual.
What is a Franchise Agreement?
When you set up a business that is part of a franchise, you enter into a franchise agreement with the franchisor. This agreement is a contract which sets out the terms of operating a business within that franchise system. Similar to licensors, franchisors often grant franchisees the right to use their products and trade under their brand name or logo.
Unlike licensees, franchisees are provided with a comprehensive operations manual requiring them to operate or market the business in a similar way to other franchisees in the network.
Franchise agreements must also comply with national franchise regulation, which include the Franchising Code of Conduct. The Code imposes various obligations on franchisors, such as providing potential franchisees with an information statement and disclosure document.
Tip: While the franchise sector in Australia is highly regulated, you do not need to register your franchise system or get government approvals for your franchise agreements. You simply need to comply with the Franchising Code of Conduct.
Am I a Franchisor?
It is important to understand whether you are a franchisor or a licensor. This is because franchisors have strict compliance obligations set out in the Franchising Code of Conduct. If you are actually a franchisor but conducting your operations as though you were a licensor, you could be penalised under the Competition and Consumer Act 2010 for failing to carry out your obligations under the Code.
The key features of a franchise agreement include:
- the franchisor substantially determining or controlling the franchisee’s operating system and/or marketing plan;
- the franchisee paying, or agreeing to pay, the franchisor a fee before starting the business; and
- the franchisee’s association with a trade mark or advertising that is owned or licensed by the franchisor.
Unlike licensors in a licence agreement, franchisors have specific obligations in regards to:
- information disclosure;
- record-keeping;
- notification; and
- acting in good faith.
