27 Aug What is the difference between a franchise and a licence?
Have you ever wondered whether licensing or franchising is the best model to grow your business? Many people wanting to avoid the cost and regulation of franchising will consider licensing as an alternative. But is licensing your business model really an alternative to franchising? What is licensing anyway and what is the difference between a franchise and a licence?
Firstly you cannot convert a franchise to a licence simply by changing the name at the top of the document. The label given to the arrangement has no influence over the legal effect of the arrangement. Franchising is just a form of licensing.
Whether the relationship that you wish to establish is really a franchise or a licence can be determined only in one way. The Franchising Code of Conduct defines certain arrangements as a franchise. The code provides that if certain ingredients are present then a franchise exists.The code does not mention the label allocated to the arrangement as one of the factors to consider.
We have summarised the way the code defines a franchise as follows:
- A franchise agreement can be written, verbal or implied;
- In the franchise agreement, a person grants to another person the right to offer or supply goods or services under a system controlled or suggested by the person granting the right;
- The business must be substantially connected with a trademark or advertising owned by the person granting the right (or an associate of that person);
- The person receiving the right must be required to make a payment for the right.
You may see from the definition above that it may be difficult for most licensors to avoid the regulation of the Franchising Code of Conduct. It is not however impossible. There are some technical ways that the code can be avoided, for instance, a cooperative is not a franchise.
The only obvious way to avoid the code, is to avoid one of the ingredients:
1. The grantor of the right must exercise little or no control over the business of the franchisee or,
2. The grantor must charge less than the wholesale price for the goods or services provided,
3. The person granted the right must not associate their business with the trademark of the grantor.
A good example of a relationship that at first might look like a franchise but, which is often not a franchise relationship, is a distributorship relationship. This is because of a lack of control and a disconnect with the trademark of the appointor of the distributor.
A partnership agreement is also generally not a franchise relationship.
So what then is a licence? A license is simply an arrangement under which one party is granted certain rights which fall outside the definition in the Franchising Code of Conduct.
Please contact us if you wish to know whether your licensing arrangement can be structured to avoid the operation of the Franchising Code of Conduct.
Why should you care whether you comply with the Franchising Code? We suggest you read our article published back in December 2011. What happens if a Franchisor breaches the Code?