Franchising or licensing can be an exciting and great endeavour to embark upon. There are differences between the 2 business models and it is important to understand how these business models are structured.
FRANCHISING
A franchisee will pay an initial fee to have access to a well known brand and reputation, pay ongoing fees and receive support from the franchisor.
Pros
Being an independent business owner with the support of an already proven successful organisation
Initial and ongoing training is offered to franchisees
Normally franchisees are also offered an exclusive territory to operate the franchise business
Franchises often have a higher rate of success than independent businesses depending on the strength of the brand
Group marketing fund is usually established that assists all franchisees in the network
Cons
Strict compliance with the Franchising Code of Conduct and disclosure requirements through a Disclosure Document
Franchisees must comply with franchisor’s rules outlined in manuals and the franchise agreement for operating the franchise business
Required to undergo training that the franchisee must pay for if the franchisor feels the franchisee requires it
Franchisee required to pay ongoing franchise fee for the life of the franchise business plus group marketing fund fee
Lack of flexibility in running the franchise as the franchisor will exercise a fair amount of control over their brand and the business
LICENSING
Licensing is a way of distributing products and services but without using the company’s brand or trademark. A licensor will charge fewer fees and provide less support to its licensees.
Pros
There are no disclosure requirements but a licensee must still comply with the Competition and Consumer Act as well as contract law
Greater flexibility in that licensees are able to supply the product or the service as they see fit but without damaging the licensor’s reputation
Licensors have less obligations and do not have to have a ‘hands on’ approach in managing their licensees
A licensee can sign a licence agreement on the day, there is no 14 day disclosure period before a licensee can sign the licence agreement. There is also no 7 day cooling off period
A licensee is able to sell a licensed product or service alongside other products or services the licensee might have
Cons
Licensors may not have a lot of control over how their brand is advertised in the marketplace
No exclusive territory to operate the business
Minimal or no training or support for licensees
Licensee are not protected by any governing body unlike franchisors being regulated by the ACCC
Licensors lose out on buying power that franchisors would have
A licensing arrangement which provides for flexibility, where you can do things your own way and will likely cost less, may be the right business model for you. However, if you prefer structure, training and support and benefiting from the use of a proven business system, then franchising is more likely the ideal business model for you.
Either way, choosing the right business model will require you to do your research before making the investment. Good luck!
If you need any advice on franchising or licensing and whether to enter into an agreement, then please contact us on (08) 8410 9294 or send an email with this form.
Written by Mirella Angelino, Senior Legal Consultant & BDO