Licensing can be a cheaper and more flexible alternative to Franchising but you must be able to construct your business model to avoid being deemed to be a Franchise.
Licensing can have many franchise like elements but it does not have the greater level of controls associated with franchising. If your model results in you exercising significant control or influence over the business of your Licensee, then most likely you have “crossed the line” and should be set up and operating as a franchise.
The ACCC oversees the Franchising Code and it does investigate companies where it believes it may be a franchise dressed up as a Licensed business. The ACCC has power to issue show cause notices, require conversion to a franchise and impose penalties on Directors if companies and Directors fail to comply with the Franchising Code. So proceed with caution because calling your business a Licensed business does not mean it is.
A well prepared License Agreement will clearly set out:
- The products or services subject to the License
- Role of the Licensee
- Rights granted to the Licensee
- Degrees of exclusivity
- The term of the agreement and what happens at the end of the period (renewal or expiry)
- The payments due (if any) to the Licensor
- Performance requirements (if any)
- Territory rights
- Breach & termination conditions
Whilst there is less work involved than setting up a Franchise, there is still critical analysis and identification of commercial and operational terms to ensure the arrangement achieves your objectives and does not lock you into any limiting conditions or lock you out of any opportunities in particular markets or sales channels.
Often, a Licensee will also be provided with Product Manuals and training material to assist them learn about the product range and customer suitability.