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There are two ways to grow your business if you are a business owner, without using your own labour and capital. These are franchising or licencing agreements. These may seem like similar business structures, but in reality, they are very different. The two strategies are generally used for different goals. However, this article will explain the difference between the two and why franchising is a much better way to grow your business in New Zealand. 

What Is Franchising?

Franchising is a business structure in which one business (‘the franchisor’) authorises someone else (‘the franchisee’) to use their business model and brand for a designated length of time. This should be implemented through an initial fee that covers the cost of the franchise.

What Is Licencing?

Licencing is when a business owner allows someone else to use something that only the business owner would have a right to use. Generally, this will be some sort of intellectual property. This licence will be granted for some sort of periodic fee and there may be an initial licence fee. 

Why Is Franchising Better for Your Business?

More Control 

As a franchisor, you will have much more control over your franchisee than a licensor has over their licensee. This is because the provisions in a franchise agreement are much more significant. A franchisee is given greater autonomy to use your branding and marketing in a way that is beneficial to the business. However, the franchisee’s way of using this branding depends on the outlines in the franchise agreement. 

On the other hand, a licensee can only use the specific intellectual property that your agreement allows. However, how they use that intellectual property is primarily left to their own consideration. For example, you may allow someone to use your logo, but they will be able to use your logo in any form as long as it complies with your licensing agreement.

Better Safeguards

Franchising also allows for better safeguards compared to licencing. Although both methods will hold either party to a binding agreement, franchising is a more formal process. As such, you will have better remedies in the case of a dispute. Most franchisors and franchisees will be a member of the Franchise Association of New Zealand (FANZ). This means that their code of practice will bind them. The code of practice requires franchisors to abide by specific guidelines such as providing disclosure documents. This means that a franchisee can see the health of the business before they buy and periodically. 

This is in contrast to a licence agreement in which there are no pre-determined checks and balances to follow. The code of practice also requires a dispute resolution process to be followed if an issue arises. This means that disputes are more likely to be resolved without the need for court proceedings. 

Better for Growing Your Business

Franchising is also a better option compared to licencing if you want to grow your business, rather than just wanting extra cash flow. When you franchise, you are structuring the agreement in a way that expands the business. For example, some of the things your agreement might require include:

  • training for staff;
  • using the same supply chain; and
  • a marketing strategy.

Essentially, a franchise is a replication of your business in another location. This means that your franchisee has an interest in helping the business as a whole grow. Your franchisee has skin in the game as they have bought the franchise. However, a licence agreement is merely a structure in which a person uses your intellectual property for a fee. They are likely to have less interest in how the business grows and are more likely to care how they can benefit themselves. Because you have less control over them, they are more likely to use your intellectual property in a way that could harm the business’s reputation.

Key Takeaways

It is essential to consider both the advantages and disadvantages when deciding to either franchise or licence your business. What you choose will depend on the situation you are in. For example, if you need extra cash flow but are not looking to expand your business, licencing may be a better option than franchising as it allows you to let the licensee be independent. However, if you are looking to expand your business, franchising is the right way to go. This is because you will have more control over your franchisee and have better safeguards when a dispute arises. It also encourages your franchisee to grow your business’s reputation as they have become an owner of the business. If you need any legal assistance with your franchise or licence, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is it worth licencing your business in New Zealand?

Depending on your current situation, licencing can be a better option. However, if you are looking to grow your business, then you should choose to franchise.

Can I cancel a licence agreement at any time?

This depends on the terms that have been outlined in your licence agreement.

Is there an equivalent body to FANZ for licencing?

No, there is not. This is another reason why there are fewer safeguards when licencing. 

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