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BlackBay Insights

  • Writer's pictureClaudia McDonnell

To Franchise Or License? What Option Is Better For You?

Updated: Apr 11, 2023

You’re a business owner operating a successful brand. You see a growing need for your products or services and want to expand into new markets. But you might not have the manpower to open up a second shop to manage on your own. How can you respond to the rapid growth of your business while reaching new markets across your city, state or country?


Establishing a franchise or licensing arrangement might be of appeal.


You may be familiar with some of the most successful franchises that have dominated the globe such as McDonalds, Starbucks or 7/11.


Due to the popularity of global franchises, it might immediately seem like the way to go for growing your business. But a license agreement might be a better option for you.


What is the difference between a franchise and a license agreement?

The difference can be largely summarised as more control versus less control.


In short, franchisors have more control over franchisees and are involved in the everyday running of the business by prescribing guidelines, rules and training of franchisees. It is essentially designed to be a duplicate of the original brand, shop or outlet or business. The franchisor is also usually responsible for providing marketing, human resourcing functions and business development support for their franchisees.


On the other hand, a licensing arrangement is more of a ‘set and forget’ situation. The licensee acquires rights to use the property of the licensor, be it the brand, logo or other physical property such as teaching materials, and is only restricted by the licensor by the extent to which they can use the brand in their product. Licensors are often given full or significant reign in how they choose to market the product and grow the business.


Let’s say the Los Angeles Lakers want to grow their brand globally. They want people to wear the Lakers logo on articles of clothing or other merchandise with a view to increasing visibility and fan base. It is unlikely that they will create a franchise in Sydney dedicated to selling Lakers merchandise because they may not know the Australian market well enough or because it might transpire that the Australian market for such merchandise isn’t sufficient large to justify the roll out of such a niche product.


An option is to license the Lakers logo to a manufacturing company in Australia who manufactures Lakers hats and t-shirts and distributes them to the Australian market. This licensee might have a better knowledge of the Australian market and has the autonomy to market the product as it chooses (e.g. selling to retailers such as Culture Kings to sell apparel). In this case, the Lakers have nothing to do with the commercial agreement between the licensee and Culture Kings, but they can derive the benefit of growing their brand with a ‘hands off’ approach.


It's also possible to ‘license’ rights on a larger scale entitling the licensee to conduct a business (such as a gym, beauty clinic, accounting practice etc) as a licensee on certain terms. Often the entitlement of the licensee to carry on the business under such an arrangement will be subject to strict compliance with a licensing agreement which can regulate amongst other things, licensing fees, terms of use of intellectual property rights, fit out and look of premises and more.


The table below identifies some of the major differences between the two systems in the table below. These are only a few of the factors that you should consider when choosing to grow your business. Reach out to the team at BlackBay Lawyers for personalised advice on which system and the types of terms will be best to grow your business.



​Franchising

​Licensing

Overview

  • A franchisor gives a franchisee the right to conduct business under the franchisor’s trading name.

  • Designed to be a duplicate of the original brand.

  • Franchise agreements are more regulated than license agreements. They are primarily governed by the Australian Consumer Laws, ACCC and the Franchising Code of Conduct.

  • An agreement that allows a licensee to use the property of the licensor.

  • Often used to grant a right to another use the brand name, logo or trademark of another company (e.g. an intellectual property license).

Control

  • Franchisors typically have more control over franchisees than in licensing arrangements.

  • Franchisors prescribe guidelines that restrict the way franchisees use and sell products, market and run the business.

  • Franchisors typically dictate franchisee operations such as uniform, shop fit out, packaging, menus, hiring process, policies.

  • The franchisor will ordinarily monitor the franchisee’s conduct closely to ensure they are complying with the procedures and systems prescribed.

  • Licensors typically have less control over licensees.

  • Licensors give licensors the permission to use their intellectual property such as the logo, trademark or name.

  • Licensees are not typically using the entire brand of the licensor, they are only using part of the brand.

  • Licensees can more often determine their own marketing strategies and systems of operating their business.

  • The licensor will prescribe what the property is that the licensee can use and to what extent they can use it.

Support

  • Supplying goods or services under a specific system or marketing plan.

  • The system or marketing plan must be substantially determined, controlled or suggested by the franchisor.

  • The Franchisor adopts the trademark, advertising or logo of the franchisor.

  • Operation manuals.

  • Prescribing business plans or requiring franchisees to submit business plans.

  • Franchisees are protected by the corporate veil of franchisors

  • A licensor is not likely to provide ongoing support, training or resources to the licensee.

  • Licensors use their own knowledge, skills and resources to market the brand.

Payment

  • ​Franchisee makes or agrees to make payments to the franchisor before starting the business.

  • ​Licensees pay licensors to use their property but it is likely less expensive than a franchisee would pay a franchisor.

Example

​McDonalds, Guzman Y Gomez, IGA, Endota Spa.

​F45, emojis on Oodies, Les Mills classes at Fitness First.


Monopoly partnering with McDonalds to attach monopoly stickers to McDonalds packaging to give customers opportunity to win prizes.


Social media influencers or celebrities attaching their name to a particular collection of clothes or line of products e.g. Kanye West x Adidas.

Written by Claudia McDonnell and Victoria-Jane Otavski

1 Comment


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