Franchising Vs Licensing Your Business – Considering Your Options

Racha Abboud

So, you're ready to grow your business and you've started to hear suggestions along the lines of "you should franchise" or "grant them a licence to operate" as different ways in which you can effectively expand your business.

Slightly confused?  Wondering which model is better for you?  Trying to decipher which one will better suit your business?

Franchising

Generally speaking, franchising is a successful strategy to grow a business once the company and its systems are successful and proven.  Whilst any type of business can be franchised, not all should be - and whether or not you choose this as a business model all depends on what you want to achieve, and how you want to go about doing it.  

At the most basic level under a franchise model, you retain control and ownership of the brand and license both the brand and the business model to a franchisee.  Whilst the know-how, training and marketing are provided by you as the franchisor, it is the franchisee who is required to put up the capital needed in starting the franchised business.  Under the franchise model, you as the franchisor maintain a considerable level of control over the operations and processes used by the franchisee.

Licensing

A licensing model on the other hand offers licences for the use of the Intellectual property owned by your company to licensees, and whilst you may exercise control over how your Intellectual property is used - you do not have any control over the business operation of the licensee.  In this licensing arrangement, you do not retain much control over how the licensee operates the business.  In effect, whilst you can specify the purpose for which the Intellectual property is to be used, licensees operate virtually independently from licensors, and you in turn provide little or even no support to the licensee.  

A licensing agreement can be drafted and be put in place quickly, with minimal cost to you and your business.  A franchise on the other hand requires a bit more work - and whilst both franchising and licensing arrangements require a franchisor or licensor to give careful consideration to what is on offer to a franchisee/licensee, a franchise model requires you to standardise your internal systems, operations, distribution and marketing networks.  

Alongside this, there are extensive regulatory requirements that must be complied with before you can start offering franchises.  As such, this normally puts most people away from the idea of franchising their business.

You may, as a starting point, decide to grant licence agreements prior to going into franchising.  Whilst this is not ideal, this may work for you if your business model supports this and you have a very clear understanding of your growth objective and the strategy required to achieve it.  If however you wish to not only grant a right to use the intellectual property but also the systems and operations of the business, then franchising is the model for you.  Whilst there may be a bit more work involved in getting your business franchise ready, the consequences of getting it wrong far outweigh the cost of getting it right from the get go.

If you have any questions regarding the difference between licensing and franchising your business, or would simply like to speak with one of our knowledgeable and experienced Commercial Advice lawyers - please don't hesitate to get in touch with:

Racha Abboud, Senior Associate
Phone: +61 2 9895 9283
Email: rabboud@colemangreig.com.au

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