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If you are looking at ways to grow your business, you may come across licensing and franchise agreements. A licensing agreement or a franchise agreement can greatly benefit your business, but knowing which one is best requires some research and will also depend on your specific business. This article will offer an overview of the key differences between a licence agreement and a franchise agreement. Additionally, it will advise when you might prefer one over the other.
What is a Licence Agreement?
A licence agreement is where one business owner (the licensor) grants a business (the licensee) the right to use something that belongs to the licensor. It is often intellectual property licensed, such as the licensor’s brand name or trademark. The licensee will pay a licence fee for the benefit they receive from using a pre-established brand.
If you are looking to be a licensor, you can benefit from a licence agreement in two ways. First, you can benefit from your brand getting more exposure. This is especially useful if the potential licensee will be in a market in which you do not operate yet. For example, if you do not have a perfume product and a licensee wants to sell perfume with your brand name, you will be expanding your brand into a new market. Second, you will also profit from the licence fee that the licensor will pay. Sometimes, this can be an ongoing fee.
If you are looking to be a licensee, you can also benefit from a licence agreement. Using a pre-established brand for your business will save you costs in developing your own brand image. In addition, some brands can be highly valuable commercial symbols for new businesses.
What is a Franchise Agreement?
Franchises are quite similar to licence agreements. They entail the franchisee paying an ongoing fee to the franchisor to use something that the franchisor has. Usually, this includes the brand image.
The key difference between a licence agreement and a franchise agreement is that a franchise agreement will usually grant the franchisee access to the franchisor’s business model. For example, if you enter into a franchise agreement with McDonald’s, you may have access to McDonald’s:
- operations manual;
- supply chains;
- staff; and
- some of their funds.
A franchise agreement can be very beneficial to you as a franchisee if the expertise you receive from the agreement is useful to your business type. The franchise agreement could save you the effort of having to develop your own:
- brand in the area;
- business model;
- marketing strategies; and
- operations strategy.
However, the value you receive from the agreement is offset by the franchise fees. As such, you should pay careful attention to the terms of your franchise agreement if you are a potential franchisee.
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Which One Shall I Use?
Whether you choose to use a franchise agreement or a licence agreement depends on your specific business.
A franchise agreement is unlikely to do well unless the franchisor provides access to a proven business model with a strong track record. Further, a franchise agreement can be a lengthy and costly process that includes:
- legal costs;
- business consultants;
- a tailored marketing strategy; and
- a pilot franchise operation.
A licensing agreement, on the other hand, is usually easier to manage. However, it is also a less complex agreement and does not have the same level of detail as a franchise relationship. For a licence agreement to be successful, the licensor will need to focus on quality assurance. Further, the licensee may have to demonstrate how they can meet the licensor’s quality standards.
Ultimately, whether you prefer a licence agreement or a franchise agreement will depend on what your business is suited for. If you wish to use business model expertise from a franchise agreement, it may be preferable. However, if you are primarily looking to use an established brand or technology to sell your product, a licence agreement might be better.
Key Takeaways
A licence agreement is where you have the right to use something that belongs to the licensor. A franchise agreement is similar but is a more comprehensive right which usually entails access to information on the franchisor’s business model. When choosing whether to enter into a licence or franchise agreement, you should always consider whether the profit you expect from the agreement will offset the costs, which can often be in the form of ongoing fees.
If you need help deciding whether a licence or franchise agreement is best for you, LegalVision’s franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A franchise agreement should come with a franchise disclosure document, which will provide you with the key information that you need to know about the franchisor’s business and history.
It is often a good idea to contact similar businesses that have entered into agreements with the provider you are dealing with. In a franchise disclosure document, you should be able to access the details of an existing business that has also entered into a franchise agreement. Additionally, you should seek professional legal advice before signing an agreement, as your legal obligations will be important to know and can be difficult to understand on your own.
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