What’s the difference between franchise agreements and licences?

Franchises and licences may look the same to the uninitiated but in business they're very different anima

What’s the difference between franchise agreements and licences?

A rose by any other name would smell as sweet but that’s not always the case with franchise agreements. Many different types of arrangements are called franchises without actually being, well, franchises. So this month we look at the spectrum of arrangements available, from a typical franchise agreement at one end of the scale to a simple licence at the other. For example, film franchises like Harry Potter and Star Wars are often referred to as franchises. But the agreements that allow the Harry Potter logo to be put on a notebook or for Star Wars’ branded pyjamas would be more akin to a licence than a franchise agreement.

The first point to note is that a franchise is a contractual arrangement. There are a few contractual provisions which would be illegal in English law – for example clauses that unfairly restrict competition or limit liability – but for the most part, parties are given the freedom to agree any contractual arrangements they wish. This means there’s no one size fits all and different franchise networks can tailor their contracts to reflect the needs of their specific business and industry.

In a typical franchise arrangement, the franchise agreement is the cornerstone of the arrangement, closely supported by the operations manual. The franchisee will be granted the rights to use the name and brand but beyond that, the franchisee will be given a complete business system. The operations manual will set out detailed procedures for every day-to-day operation the business carries out, from recruiting and training staff to advertising, preparing new client quotes, delivering goods and services, billing and getting paid. The franchise agreement will contain an obligation that the franchisees operate their business in accordance with and following the procedures set out in the operations manual. Moreover, the franchisee can expect a substantial level of initial and ongoing training and support from the franchisor.

On the franchisor side, the franchisor will allocate significant time and resources to policing and supporting the network to ensure all franchisees are operating their businesses in accordance with the franchisor’s policies and procedures. This ensures quality is maintained across the network and that all customers enjoy a consistent experience, regardless of which franchisee they use. This is important because a rogue franchisee who fails to achieve the required standards risks damaging not only his business but also the brand and consequently the businesses of all other franchisees in the network.

At the opposite end of the scale to a franchise agreement, the parties could enter into a simple licence arrangement. In the case of a licence, the licensee is granted a right to use the brand but without the support, training and business methodology that comes with a full franchise. The licensor will have limited rights to protect the integrity of the brand and ensure that the brand isn’t being used in a way that could be damaging to it” – for example, by not attaching the logo to inferior goods-” but the licensee will be largely allowed to conduct its business however it sees fit. This includes choosing its own suppliers and marketing activities and setting its own budgets and business plans.

In both cases, the fee structure could involve upfront payment, fixed fees, royalties charged as a percentage of turnover or any combination of these. However, in the case of a licence, royalty rates would typically be lower than in a franchise to reflect the fact that a licensee is getting less than a franchisee does. A franchisee would expect to pay more for the business methodology, ongoing support and training which is often not available to licensees.

Between these two extremes lie an infinite number of variations. Some licence arrangements will include a limited amount of support and some franchise agreements offer limited input in how the business operates. Ultimately, the parties can call the contract whatever they like and can include whatever rights and obligations are appropriate in their specific circumstances.

Most, but not all, agreements will include some form of exclusivity. In a franchise this is usually based on geographical parameters so that the franchisee is the only person allowed to operate under the brand in their specific territory. In the case of a licence, exclusivity could be based on geographical areas or industry sectors. For example, a licence may provide that a manufacturer of a certain type of goods will be the only manufacturer allowed to produce those goods under the brand. Whilst there is no requirement to include any form of exclusivity in either type of agreement, non-exclusive arrangements are more common in licence agreements than franchise networks.

Franchise agreements will usually provide that the arrangement is personal to the individual franchisee so that the franchisee cannot sub-licence their rights to anyone else.” The exception to this is in the case of a master franchise where the master franchisee will be allowed to appoint sub-franchisees. Licence agreements may or may not contain a right to allow the licensee to sub-licence their rights to other people.

Overall, franchise agreements and simple licences have much in common. As a general rule, the more control that the licensor has over what and how the licensee operates, the closer the arrangement is to a franchise agreement. Conversely, the less control that the licensor has, the more the arrangement is likely to be a simple licence.”

Kate Legg
Kate Legg