In Short
- Licensing allows you to grant others the right to use your intellectual property with minimal control, providing a flexible growth strategy.
- Franchising gives you more control over operations and brand consistency, but comes with stricter regulations and greater involvement.
- Choose licensing for flexibility and low involvement, or franchising for greater control and scalability.
Tips for Businesses
Consider your business goals when deciding between licensing and franchising. If you want to expand your brand without heavy involvement, licensing may be the right choice. However, if you seek greater control over operations and brand consistency, franchising could be the better option. Each model has distinct benefits and challenges.
When exploring strategies to grow your business, licensing and franchising are two powerful options worth considering. Both offer unique opportunities to extend your brand's reach, generate additional revenue, and tap into external expertise. The right choice depends on your long-term goals, desired level of involvement, and business structure. This article will explore the key differences between these business models and help you determine which is best for your business.
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.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
What is Licensing?
Licensing is where you (the licensor) grant another party (the licensee) the right to use your intellectual property (IP), brand, or products. The licensee pays for the right to use your brand name, technology, or other assets for a set period.
Key Characteristics of Licensing
Some of these are listed below:
| IP Based | You grant rights to your IP, such as trademarks, patents, designs, or copyrights. |
| Limited Control | The licensee can use your IP but operates independently. You do not control their day-to-day operations. Instead, you largely provide guidance and advice rather than setting strict standards and operational models. |
| Revenue Model | You typically receive licensing fees. |
| Limited Regulation | Licensing in Australia is not subject to the same regulations as franchising. |
What is Franchising?
Franchising is a more structured and regulated business model. As a franchisor, you grant a franchisee the right to operate under your brand, following your business model and operational systems. The franchisee agrees to run their business under your operational guidelines, and you provide them with support, training, and ongoing assistance.
Key Characteristics of Franchising:
Some of these are listed below:
| Business System | You provide not just your IP, but a full system, including operations manuals, training and support. Some franchisors also provide marketing support to their franchise networks. |
| Higher Level of Control | The franchisee must follow your systems, and you retain a higher level of control over how they run their franchised business. |
| Revenue Model | You earn revenue from upfront franchise fees, ongoing royalties, and other fees (including any marketing fees). |
| Highly Regulated | In Australia, franchising is regulated by the Franchising Code of Conduct. This ensures franchisees are protected and have full disclosure. |
Licensing vs. Franchising: Key Differences
While both licensing and franchising will allow you to expand your business, their differences are crucial to understanding which model suits your goals.
| Licensing | Franchising | |
|---|---|---|
| Control Over Operations | You have minimal control over the licensee's business operations. The licensee operates independently. Your primary involvement is in enforcing the proper use of your intellectual property. | You exert significant control over how the franchisee operates their business. They must adhere to your system, processes and guidelines. This allows you to maintain brand consistency. |
| Revenue and Fees | Licensees typically pay for the rights to use your IP. This is often through a one-off fee or an ongoing licensing fee. There is no obligation for a licensor to provide ongoing support. | Franchisees usually pay an initial franchise fee and ongoing royalties. This can be a percentage of their revenue. In addition, some franchisors charge other fees, such as marketing contributions. In exchange, you provide training, support, and continued oversight. |
| Regulation | Licensing agreements are primarily governed by contract law and intellectual property laws. There are no specific regulations covering licensing agreements in Australia. However, they must still comply with general laws, such as the Australian Consumer Law. | Franchising in Australia is subject to strict regulation under the Franchising Code of Conduct (the Code). The Code imposes specific obligations on franchisors. This includes disclosure requirements, cooling-off periods and dispute resolution processes. |
Understanding Franchising in Australia
If you are considering franchising as a growth strategy, it is essential to understand that Australia has a highly regulated franchising sector. The Code aims to ensure transparency and protect the rights of franchisees. This is due to the power imbalance that can exist between franchisors and franchisees.
As a franchisor, you have strict obligations to your franchisees, three of which are listed below:
- Disclosure Document: You must provide prospective franchisees with a detailed disclosure document, which includes financial statements, a summary of your franchise agreement, and other critical information about the franchise.
- Cooling-Off Period: There is a mandatory 14-day cooling-off period after signing the franchise agreement, during which a franchisee can withdraw without penalty.
- Good Faith Obligations: Both you and your franchisees must act in good faith throughout the duration of the franchise relationship.
Failure to comply with these requirements can lead to severe penalties, including financial compensation and the invalidation of franchise agreements.
It is essential that licensors avoid inadvertently being seen to operate as a franchisor if the licensing agreement crosses into areas regulated by the Code. This can occur if the licensor exerts significant control over the licensee's:
- business operations;
- marketing strategies; or
- brand usage.
If a licensing arrangement imposes operational guidelines or ongoing support resembling a franchise, the arrangement may be reclassified as a franchise and expose the licensor to unintended regulatory obligations under the Code.
Which Model Is Best for Your Business?
Now that you understand the key differences between licensing and franchising, it is time to assess which model aligns best with your business goals and operational capacity.
When Licensing May Be Right for You
Licensing could be ideal if:
- you have valuable intellectual property but lack the resources to expand your business infrastructure or operations;
- you want to minimise financial risk by allowing licensees to manage their own operations;
- you are comfortable giving licensees more autonomy in how they operate, even if it means less control over brand consistency; and
- you want to limit your ongoing obligations.
When Franchising May Be Right for You
Franchising could be a better fit if:
- you want to maintain strict control over how your brand is represented and ensure consistency across all business locations;
- you are willing to invest in the long-term success of your franchisees, providing them with support, training, and marketing;
- you want to build a widespread network of businesses under your brand while maintaining a uniform customer experience; and
- you are looking for a scalable model that allows for rapid expansion while ensuring operational standards are upheld.
Key Takeaways
Choosing between licensing and franchising is a strategic decision that depends on your business objectives, the level of control you want to maintain, and your willingness to navigate the relevant legal frameworks. Licensing offers flexibility and low involvement, making it an excellent option for IP-based businesses. On the other hand, franchising provides a structured, regulated path for brand growth and expansion. However, it comes with additional obligations.
If you are unsure which model is best for your business, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee.
Frequently Asked Questions
Is franchising more regulated than licensing?
Yes, franchising is subject to strict regulation, including the Franchising Code of Conduct in Australia, which ensures franchisee protection. Licensing, on the other hand, is primarily governed by intellectual property laws and general contract law, with fewer regulatory requirements.
Can I use licensing or franchising to expand my business?
Both models offer ways to grow your business. Licensing is more flexible and requires less involvement, making it ideal for businesses with valuable intellectual property. Franchising provides a structured and scalable model, allowing for greater control over brand consistency and operations.
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.
