Licensing is when the rights to intellectual property such as trademarks, designs or technology are sold by a person or business (the licensor) to another entity (the licensee) to use in their own ventures. Franchising involves more control from the business (the franchisor), who allows a person or business to open a store modelled after their own business (the franchisee).
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What should you choose: License or Franchise?
Licensing is cheaper for a licensee than franchising would be. And while licensing usually has a one-time or annual fee fee, franchisees usually pay more regular fees. A licensor has little to no rights or control over the operation of a licensee. Franchisors, however, have control over the branding, goods/services sold and many other restrictions on the franchisee.
However, franchisees are offered benefits too, such as exclusive geographical rights to sell, supply or distribute goods and services. Support from the franchisor is perhaps the biggest advantage of becoming a franchisee. This often includes financial assistance, management training and ongoing guidance in growing your franchise store. Franchises are usually a developed business with a strong business model, marketing strategies and a well established name and reputation.
License Agreements
Licensing is when a person merely sells the rights to something; they still own the rights but they are granting permission for commercial or personal use. A common example is a trademark licensing agreement, which enables a company to grant the use of it’s trademark to another business.
There are many considerations that go into a licensing agreement. When drafting a licensing contract, consider:
- if the rights are exclusive, non-exclusive or sole to the licensee
- sub-licensing rights of the licensee
- the geographical restrictions of the license
- any limitations that may apply to the use of the intellectual property
- time limitations or expiry terms
- payments to be paid by the licensee
- the royalty rate and terms
- the performance obligations, such as development milestones and minimum sales, of the licensee.
Franchise Agreements
A franchise agreement is either a written, oral or implied agreement between the franchisor and the franchisee about granting the rights to carry on the offering, supplying or distributing goods or services.
Franchisees are subject to the Industry Codes under Federal law. The relevant industry code for parties to a franchise agreement is the Franchising Code of Conduct, regulated by the Australian Competition & Consumer Commission. Failure to comply with franchising industry codes can incur civil penalties of up to 300 penalty units (approximately $63,000).
Disclosure Document
Potential franchisees need to be provided with a Disclosure Document from the franchisor if there is an intention to enter into, renew, or extend the period or scope of a Franchise Agreement. Further, the franchisor must continue to provide a continuing franchisee with a Disclosure Document within 4 months after the end of each financial year. Amongst a wide range of information about the franchise, the disclosure includes financial, litigation, intellectual property and marketing information.
To check if your Franchise Agreement contains all the relevant information, talk to a franchise lawyer.
Good Faith
Franchise agreements require that parties to act in good faith. While the Code doesn’t explicitly define good faith, generally it means acting honestly and not arbitrarily. Each party should also not exercise their powers for some irrelevant purpose, but to achieve the purpose of the agreement.
Cooling-off Period
If a new franchisee wishes to end a franchise agreement, they have 7 days to. The cooling-off period commences from whichever of these two occurs first:
- entering into the agreement (or an agreement to enter into a franchise agreement)
- the making of a payment under the agreement.
Conclusion
Ultimately, the choice of whether to enter into a license or franchise will come down to the needs and purpose of your business. Each type of agreement has it’s own advantages and downsides, and will work better for some business ideas and not for others. To get advise about the best agreement for your business ventures, contact a business lawyer to discuss your options.
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