Which Is Better, Franchising or Licensing?
This topic may spark some debate because, in the end, it really depends upon what you want out of the relationship. Franchising and Licensing are terms which describe very similar relationships but with stark differences.
Our web page "Licensing or Franchising" outlines the difference between licensing and franchising. You should refer to that page for a definition and application of the terms.
Here we look at which is better.
Firstly, franchising in Australia is governed by the Franchising Code of Conduct (the "Code"). This is a compulsory code and neither franchisors nor franchisees can contract out of its provisions.
The question arises, is the Code a good thing or a bad thing?
Many franchisors lament the requirements of the Code stating they are too onerous and costly.
It is true, under the Code franchisors have to prepare a disclosure document and it must be updated each year. The franchisor has to disclose to the franchisee and comply with notice requirements and requirements relating to marketing funds and information statements and financial disclosure and so on.
A licensor does not have to comply with those obligations.
Ask yourself, are those obligations really that onerous? Do they represent best practice? Do they help with recruitment?
Franchising may make it easier for a franchisor to recruit franchisees because a franchisee feels protected and "safer" with a disclosure process and legislation built to protect them. The use of the term "franchise" may itself be a draw card because it is readily identifiable to potential franchisees who are well aware of the many success stories franchising has to tell.
However, licensing by comparison, is easier. there are no real hurdles to jump through. A license agreement must of course be compliant with the relevant legislation including the Competition and Consumer Act and contract law, but there are no disclosure requirements. A licensee can be signed up on the day, there is no 14 day disclosure period before a licensee can sign the license agreement. There is no 7 day cooling off period once they do sign.
So, a franchise may be easier to "sell" due to the Code but there are obligations to be met. A license agreement may offer a quicker process to sign up a licensee.
You will recall, that the definition of franchising includes elements that allow or provide for a certain amount of control by the franchisor.
A license arrangement generally means a licensor has less control. For example, a license agreement may provide for a licensor granting a licensee the right to distribute a product using a specific brand but the licensor cannot tell the licensee how to market or run their licensed business.
Franchisors generally have more control over franchisees. Franchisors can determine how a franchisee will operate their business and market their business.
Licensing can be attractive to licensors who do not want a hands on approach to managing the licensees. In some instances the licensor may just supply the product and let the licensees distribute the product as they see fit but, of course, without damaging the reputation of the licensor or the product.
Franchisors will generally be required to play more of a role in their franchisee's business by providing support and assistance.
Licensees may not have a lot of control over how their brand is portrayed in the market place whereas franchisors will exercise a lot of control over their brand.
Generally licensors will have less control and less obligations but this may be to the detriment of their brand. Franchisors will be required to contribute more but will control their brand more.
Generally franchisors will charge more than licensors. However, the franchisor may be required to invest in more infrastructure and provide more support for that fee.
A licensor potentially may not charge the licensee a fee for the grant of the right to distribute the product. The licensor may choose not to charge an ongoing license fee but may just supply product to the licensee and make a profit from the supply of the product. Of course the licensor may charge whatever fees it wants (providing it does not trigger the franchise definition which may mean the license becomes a franchise agreement and must comply with the terms of the Code.)
Franchisors usually charge an initial franchise fee for the right to operate the franchised business. In addition they will usually charge ongoing franchise fees or royalties and may charge fees if the franchisee wishes to renew the franchise agreement or sell the franchised business.
So, franchisor's generally charge more fees but need to provide more services and support and generally have more expenses. Licensors tend to charge fewer fees and provide less support. That is not to say either model is more profitable, that will depend on the circumstances of each arrangement.
Neither relationship is better than the other, they are just different. Whilst franchising may suit a certain arrangement licensing may suit another arrangement. Each will depend greatly upon what the parties wish to achieve from the arrangement.
This article is not to be considered or relied upon as legal advice. You should seek legal advice about your circumstances.