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As a business owner, you may be looking for different ways to expand your business. Two of the ways you could do this are by a licence agreement or a franchise agreement. However, it may not be clear as to what differentiates these two types of contracts. This article will detail what a licence and franchise agreement is and outline the key differences between the two. 

What Is a Licence Agreement?

Under a licence agreement, you (as the licensor) allow another person or business (the licensee) to use something that you either own or have a right to use. An intellectual property licence agreement will give the licensee the right to use the licensor’s:

  • registered trade mark, such as a brand name or logo;
  • product design;
  • copyright; 
  • patents; or
  • any other type of intellectual property that the licensor owns or has a right to own. 

The licensee will be allowed to use this intellectual property in exchange for some form of payment. This use will have to align with the terms of the written licence agreement, which can vary from being quite broad to complex and specific. 

What Is a Franchise Agreement?

Franchising is a business method, through which you (as the franchisor) authorise another person (the franchisee) to operate a business (the franchise) using your trade marks, business systems and products for a specified period. Westpac, the Coffee Club and Night ‘n Day are all New Zealand franchises. 

The franchise agreement is a contract that creates and governs the continuing relationship between the franchisor and the franchisee. 

Key Differences Between a Licence and Franchise Agreement

Although both are contracts, licence and franchise agreements differ in three key matters.  

Scope

Under a licence agreement, a licensee can only use the specific kind of intellectual property stipulated in the license. How the licensee uses this intellectual property is largely left to their discretion. However, this use must comply with the licence agreement.

In contrast, by entering into a franchise agreement, a franchisee obtains permission to use many things. A franchisee receives the right to use your trade marks – your business name and logo – in conjunction with your marketing and business systems, and any products you import or manufacture for the business. Unlike most licence agreements, how the franchisee uses these matters is dictated in and restrained by the franchise agreement. 

Contents

As the two contracts differ in the scope of property that you permit the licensee or franchisee to use, each agreement will contain different kinds of terms. 

A licence agreement will typically contain clauses on the:

  • field of use of intellectual property. If it has more than one use, you should explicitly state what use you are permitting the licensee to have;
  • extent of the territory that the licensee can use the licence;
  • duration; 
  • sign-on fee of the licence; and 
  • royalty rate. This rate will be an ongoing cost you charge for the use of the licence. 

A franchise agreement tends to be far more extensive than a licence agreement and will place more obligations on the franchisee.

Common provisions in a franchise agreement are:

  • grant of rights to the franchisee; 
  • renewal clause;
  • the territory of the franchise;
  • costs. These costs will be both the up-front franchise fee, and ongoing payments of both royalties and profits to the franchisor; 
  • date of opening;
  • minimum performance standards;  
  • intellectual property rights;
  • termination; and
  • any other continuing obligations on both the franchisor and franchisee. These may be the minimum opening hours, the insurance or any uniform requirements. 

A franchise agreement will also be accompanied by other documents, such as the franchise operations manual and a disclosure document. A disclosure document is a requirement of the Franchise Association of New Zealand (FANZ) and will contain information from the franchisor that is material to running the franchise. 

Rights and Obligations

Your rights and obligations as a franchisor will differ from those as a licensor. Generally, as a franchisor, you have more control over the use of your intellectual property and trade marks, but also more obligations to uphold.

Under a franchise agreement, you as a franchisor:

  • dictate the specific methods and systems that the franchisee must abide by; 
  • monitor the franchisee’s performance. Typically, a franchisee has to meet a minimum quota or performance standard; 
  • pay certain fees, such as for the marketing of the franchise;
  • receive a proportion of the profits of the franchise; and 
  • provide training and support to the franchisee. 

Under a licence agreement, you as a licensor:

  • have little monitoring obligations. The extent at which you will have to monitor the licensee will depend on the standards that you set in the licence agreement; 
  • receive ongoing royalties for the use of your intellectual property; and
  • may have to engage in proceedings on behalf of the licensee for infringement of the intellectual property. 

Key Takeaways

There is quite a difference between a licence and a franchise agreement. Which contract you choose to enter into will depend on:

  • the extent of control you wish to have; and
  • the ongoing obligations you are comfortable with taking on.  

A licence agreement provides you with less control over how your intellectual property is used but places fewer obligations on you as a licensor. A franchise agreement accompanies far greater obligations on you as a franchisor. However, it means that you have more control over the franchisee’s conduct about the franchise. 

If you need assistance drafting a franchise or a licence agreement, LegalVision’s franchise lawyers can help. Get in touch with us on 0800 005 570 or complete the form on this page. 

Frequently Asked Questions

What is the difference between a licence agreement and a franchise?

There are two key differences between a licence agreement and a franchise. A franchise provides the franchise owner (the franchisor) more control over the franchisee’s decisions and places more obligations on the franchisor. A licensor has fewer obligations when they provide a licence to their intellectual property and has less control over their intellectual property.

What is a franchise agreement?

A franchise agreement is a legal document that creates and governs the relationship between the franchise owner (the franchisor) and the franchisee.

What is in a franchise agreement?

A franchise agreement contains a wide range of terms. It will usually contain clauses on: the rights and obligations of the franchisee; the responsibilities of the franchiser; costs; intellectual property rights; and any other requirements for running the franchise.

Why is a licencing agreement better than a franchise?

A licencing agreement is not necessarily better than a franchise agreement; the two types of contracts are just different. If you are the owner of a trade mark or copyright, you have fewer obligations under a licencing agreement to the licensee. However, you also have less control over what the licensee does with your intellectual property.

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