Business Advice - Franchising vs Licensing

Franchising vs Licensing

What is the difference between Franchising and Licensing?

This is a very good question and one I get asked often. Many peoples are genuinely confused about the terms franchising and licensing and often use them interchangeably.

Business owners tell me that they want to license their business rather than franchise it, believing that licensing has much of the same advantages as franchising but without the costs and regulations. Unfortunately, this belief is wrong on many levels. So, to help dispel the myths here is a summary of the facts:

Licensing is a broad umbrella terms that describes a range of business models where a business owner can leverage their growth. The terms licensing may include:

  • Distributorship
  • Agency Agreements
  • Franchising

The major distinction between a franchise and other types of agreement which involve licensing of rights is the issue of the use of the trade name and logo; and business systems.

While you can call your business whatever you like – a license, a franchise, or a distributorship the real distinction is NOT in the NAME but in the AGREEMENT itself.

If ANY agreement contains the following 4 criteria then irrespective of whether you call it a license, an agency agreement or a franchise the LAW deems it as a franchise and so requires compliance with the Franchising Code of Conduct.

A summary of the 4 criteria are:

  1. There is a written, oral or implied agreement,
  2. There is a payment of a fee, either up front or ongoing, for the provision of goods or services,
  3. The supply of goods and/or services is under a system or marketing plan,
  4. The business is substantially associated with a trade mark, advertising or commercial symbol

It’s safe to assume that all these models of growth contain an agreement and almost certainly some form of payment. So, the real distinction between a franchise and a license depends on the third and fourth criteria.

So, the question becomes which of these 2 criteria do you leave out?

Do you want them to trade under your name (element 4) without any input or support from you, and if so, what will this do to your brand name and reputation?

Conversely do you want to give them advice on how to best sell your product/service (element 3) but then have them do so under their own brand name effectively becoming your competition?

Franchising is not as scary as you might think and nor does the cost need to be prohibitive for small business owners.

If you are in any doubt to whether your business is a licence or a franchise, or if you just want to set your business up correctly don’t rely on hearsay or other advice (including from you Business Coach) talk to a lawyer and get legal advice.