Is the business opportunity you are looking at a franchise or a licensed business? At first glance, there’s not a lot to differentiate franchises with some types of license agreements. However, both commercially and in a legal sense, there are some significant distinctions between the two models.

Given the strict obligations prescribed by the Franchising Code of Conduct, some companies are inspired to intentionally structure their business in such a way that they are not caught by the Code; usually this is by offering licenses to exploit intellectual property within a prescribed territory, as opposed to a franchise (which also provides a mechanism to exploit intellectual property within a prescribed territory). 

The Code clearly identifies which businesses fall within its scope by explaining what characterises a franchise. 

What defines a franchise?

There are four key elements that identify a business opportunity as a franchise:

1. Whether an agreement exists – This is not difficult to establish: the agreement can be written, verbal, a combination of both, or merely implied from the parties’ conduct.
2. Right to use Intellectual property – Whether or not the business will associate, to some degree, with a trademark or other IP materials owned, utilised or designated by the grantor of the agreement.
3. Imposing fees – A fee is defined broadly under the Code to encompass not just royalties and marketing contributions but additionally, licencing fees, commission-based fees, and fees aimed at training of staff. This also covers circumstances in which the franchisor gets paid by customers, subtracts fees and gives franchisees the remainder, irrespective of whether or not these payments are accounted for in whatever arrangement is in place.
4. A marketing strategy/plan – Will the grantor of the arrangement determine all, or most, marketing efforts?

A business exhibiting all four elements is defined as a franchise – no matter what it calls itself.