At one level there isn’t much difference because a franchise is simply a “tough” licence under which the licensor imposes a great deal of obligations on its licensees and regulates every aspect of how the licensee operates its business. It is for this reason that businesses who are thinking of franchising need to establish whether they really do need to control all aspects of a franchisee’s business because, if they do not then a looser licence type arrangement may work better.
The fundamental difference between a licence and a franchise is that you can licence know how or trade marks or a business idea but you cannot franchise them. All of the above could well be elements of a franchise but the essential element of a franchise which is missing from a licence is that the franchisor has established that its business can be replicated successfully. As a result, if a franchisee does what the franchisor requires and does not do what the franchisor prohibits, then that franchisee’s business will be successful. Licences do not come with any implied guarantee of success.
Written by: John Pratt
Partner, Hamilton Pratt