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As the owner of a growing brand, you may be looking to make a profit off your business or expand your reach. You can do this through corporate expansion, but that is an expensive and often slow process. You can also do this through franchising or licensing. This article will outline: 

  • what is franchising;
  • what is licensing; and
  • the key differences and similarities between these business methods.

What is Franchising?

Franchising is when an individual (the franchisor) develops a business model and grants the right to use this model to others (the franchisees) for a fixed period by entering into a franchise agreement and strictly complying with an operations manual stipulating standards of operation. This model is known as the franchise.

To gain access to the franchise brand and operational systems, the franchisees pay the franchisor an upfront cost and ongoing franchise fees. The franchisor provides their franchisees continued support and training to ensure that their franchise continues to grow and remains profitable.

A wide variety of industries can become franchises, such as:

  • food and beverage;
  • building and construction;
  • business support services; and
  • home services, such as gardening or cleaning. 

What is Licensing?

Under licensing, an individual (the licensor) allows another individual (the licensee) to use a brand or logo or trade mark they own or have rights to licence (the licensed property) in exchange for a payment. There is no requirement to comply with standards of operation as a condition of the licence. The licensed property can be a:

  • registered trademark, such as a logo, name or brand; 
  • product design; 
  • copyright; 
  • patent; or
  • piece of intellectual property that the licensor owns or has a right to own. 

The licence agreement creates and governs this arrangement. To suit the wide variety of licensed property, there is a wide range of licence agreements.

For example, product licensing or patent licensing.

Are There Similarities Between Franchising and Licensing?

The key similarity between franchising and licensing is that both business methods involve you allowing another individual to use your IP in exchange for payment. In franchising, this intellectual property includes the:

  • brand – the name and brand of the franchise; and
  • business methodology or model – the operational systems of the business. 

In licensing, it is the brand alone that is being licensed. You cannot control the licensee’s method of operation. Under both methods, you can:

  • make an income off of your intellectual property; and
  • grow your brand through the use of another individual’s (the franchisee or licensee) resources and labour. In franchising, you will have replicas of your business operated by your franchisees. In licensing, you will have licensees using your brand name or particular product in the running of their own business.

What Are the Differences Between Franchising and Licensing?

There are key distinctions between franchising and licensing that may be useful in determining which business model you wish to adopt to grow your business. These differences include:

  • the agreement governing the arrangement;
  • the business systems; and
  • your level of support.

The Agreements

A contract governs both the relationship between a franchisee and franchisee and a licensor and licensee. However, what you include in these agreements will differ between franchising and licensing.

A franchise agreement will usually have far more detail than a licence agreement and place more obligations on the franchisee compared to a licensee. The agreement will likely contain provisions on;

  • the grant of rights to the franchisee;
  • a right of renewal; 
  • the costs of the franchise, such as an initial franchise payment and ongoing franchise fees;
  • minimum performance standards; 
  • termination; and
  • the obligations that accompany the running of the franchise. These obligations may include the date of opening the franchise, minimum opening hours, insurance, and uniform requirements.

If you do wish to start a franchise, you will also have to draft other documentation alongside the franchise agreement. These documents include a franchise operations manual and a disclosure document. Although the disclosure document is not legally required in New Zealand, if you become a member of the Franchise Association of New Zealand (FANZ), they have certain standards that they require of their members. This includes the drafting and issuance of a pro forma disclosure document to their standards.

Legal Requirements

In other countries, such as Australia, the distinction between a franchise and licence is vitally important. This is because a licence could be voided if it was deemed a franchise under Australian law. This is because there is a Code of Conduct that requires franchise systems to comply with strict legal requirements.

Here in New Zealand, we do not have a formal Franchise Code. Therefore, the distinction is still important to understand, but a licence would not automatically be deemed unenforceable if it had elements close to a franchise (as it might be in Australia).

However, it should be noted that most prospective franchisees will look for FANZ membership when looking to purchase a franchise. It is recommended that any franchisor expanding in New Zealand becomes a member and complies with the disclosure document requirements of membership.

A license agreement will usually contain provisions on the: 

  • use of the licensed property;
  • extent of the territory in which the licensee can use the property;
  • duration of the licence; and 
  • costs associated with the licence.

In simple terms, a licence is a more loose and less strict arrangement, where you are not concerned about the standards of the licensee operating its business. Licensing tends to just involve the licensing agreement.

The Business Systems

In the franchise agreement, you will dictate the systems through which the franchisee can use your intellectual property. These systems will be detailed to ensure that each of your franchises is run in the same manner and to the same standard. These systems may involve:

  • a specific uniform that all staff must wear;
  • specific locations for your franchise locations; and
  • a particular way in which the franchisee should fit out the business. 

In licensing, there is no particular system that the licensee must follow.

For example, if the licensee has a licence for a name that you have trademarked, they are able to operate a business under this name in any manner they wish. There are no requirements set out in the licence agreement on how they should decorate their premises or dress their staff.

Under franchising, you have more control over how your intellectual property is used by your franchisees.

The Level of Support

As a franchisor, you are obliged to provide continued support to your franchisees. You will have to:

  • assist in training new franchisees and staff for your franchise locations;
  • provide certain maintenance services; 
  • conduct annual financial reporting; and
  • update your operational systems to ensure that your franchise is run as effectively as possible.

These efforts are required to make sure that your franchise continues to be profitable and efficient across all franchise locations.

As a licensor, you are not required to provide ongoing support to your licensees. Each licensee is individually responsible for the success of their own business when using your licensed property.

Key Takeaways

Franchising and licensing are two ways through which you can expand your brand and make an income off of your intellectual property. However, there are key differences. Franchising provides you with greater control over the use of your brand but also accompanies more obligations. You will have to draft a detailed franchise agreement and operational system and provide ongoing support to your franchisees. Licensing provides you with less control over how your property is used but allows you to be more hands-off. If you need assistance with franchising, contact LegalVision’s franchising lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is franchising?

Franchising is when an individual (the franchisor) develops a business model and grants the right to use this model to others (the franchisees) for a fixed period by entering into a franchise agreement.

What is licensing?

Under licensing, an individual (the licensor) allows another individual (the licensee) to use something they own or have rights to (the licensed property) in exchange for a payment.

What are the differences between franchising and licensing?

The differences between franchising and licensing include the agreement governing the arrangement, the business systems and your level of support.

Is franchising a form of licensing? 

Franchising and licensing are two different business models. However, both models involve you allowing another individual to use your intellectual property, such as your brand name, in exchange for payment.

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