What is a Franchise Model?
Franchising is a business model that enables the replication and scaling of a business concept. The Franchisor grants to the Franchisee the right to use the brand, intellectual property, products, knowledge and systems of the Franchisor in return for upfront and ongoing payments to participate. It is a model that involves structure and control over the way the business is marketed and operated.
Franchising law in Australia is governed by the Franchising Code of Conduct (“the Code”).
The Code deems a model to be a Franchise if all 4 of the following elements apply:
- There is an agreement (written, verbal or implied) to grant a right to carry on a business
- The business is substantially or materially conducted under the brand or trademark of the grantor
- There is a payment to the grantor to carry on the business (initial fee, royalties, commissions, training fees or payment for goods or services); &
- The manner in which the business is conducted or marketed is substantially determined or controlled by the grantor. Here Courts will consider aspects such as the extent of training provided, assistance with business development / lead generation, price guidelines, advertising guidelines, marketing roles and requirements, centralised reporting and the passing of knowledge.
Once deemed a Franchise there are behavioural and operational requirements specified by the Code, including disclosure and the key content of Franchise Agreements & Disclosure Documents.
Aspects of the law related to franchising, including whether a business is deemed and should be operating as a franchise, are overseen by the Australian Competition & Consumer Commission (ACCC) and the ACCC can compel conversion to a franchise and/or impose penalties for failing to comply.
Go to the ACCC website for key Franchise material
What is a License Model?
A License model provides the right to use knowledge, goods or services under a structured arrangement but without the high degree of control afforded by a franchise arrangement. The most common form of a License is to permit use or resale of a product or service.
A License agreement can allow use of a brand or trademark provided the Licensor does not substantially determine or control the way the Licensees business is run or marketed. Alternatively, it can substantially control the way the business is run or marketed if it is being operated under an alternate brand or mark. This is more common with “white label” manufacturing where process and standards are important but they are not trading under a shared brand.
License agreements may contain performance requirements (eg sales/ purchasing targets), some controls for brand protection or product compliance, as well as breach and termination provisions.
A Licensed model is not governed by the Franchising Code but other laws do apply.