At Coleman Greig, we are often asked by clients "What is the difference between licensing and franchising?"

Generally speaking, licensing and franchising both deal with the selling of certain intellectual properties to third parties such as software, trademark, or a business process. Franchising however has a greater deal of control by the franchisor than a licence.

A franchise always includes a licence of the brand and operating methods, along with assistance (such as training and an Operations Manual) or support (providing advice, quality control, inspections etc).

The Franchising Code defines a franchise agreement as an agreement, either written, verbal or implied, that has the following characteristics:

  • one party (the franchisor) grants another party (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services under a specific system or marketing plan;
  • the franchise business will be substantially or materially associated with a trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor; and
  • the franchisee is required to pay, or agree to pay, a fee to the franchisor before starting or continuing the business.

Simply because a business is called a licence does not mean it cannot be a franchise. If a licence meets the above definition, it is most likely a franchise and must comply with the Code.

Licensing on the other hand is a business structure and method of distributing goods and services. In most cases, the licensee does not retain rights to use the company's trademark; does not have exclusive territorial rights; and does not receive training or ongoing support from the licensing company.  The licensor is often free to sell similar licences and products to other people in the same geographic area.

Whilst licence opportunities are often less expensive than franchises - in both the upfront investment and ongoing fees - the major negative aspect of licensing is a lack of control over licensees to get them to follow crucial systems such as sales techniques.Whether you choose to licence or franchise, you need to understand your obligations as a Franchisor/Licensor or Franchisee/Licensee under both systems.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.