Franchise vs. license agreements

Written by lisa ann burke
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Franchise vs. license agreements
(Image by Flickr.com, courtesy of Evan Wood)

Many potential business owners are confused between the concepts of a franchise and license (a.k.a. business opportunity). A key difference lies in the area of law by which each business type is governed. This legal difference forms the basis for what information needs to be included in each type of agreement.

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Legal Difference

Franchising is based on securities law while licensing falls under the purview of contract law. In layman's terms, this means that if a business wishes to expand through franchising, it must register in the appropriate jurisdictions and also incorporate certain information into its franchise agreement. A license agreement is simply a business contract between two parties.

Franchise Agreement Basics

A franchise agreement is a usually lengthy document and covers such area as the cost of the franchise, royalty payments, rights and obligations of franchiser and franchisee, territory rights, training and support, as well as disclosure of financial documents.

License Agreemnt Basics

A license agreement is typically of shorter length and grants the licensee the right to use, market and sell the product of service of the licenser without penalty. It usually also covers the cost of the license, royalty fees, as well as territory rights. However, there is no obligation for the licenser to disclose its financial information.

Business Relationship

Both the franchise and license agreement will stipulate that franchisees and licensees are considered independent contractors and, as such, are not employed by, or in partnership with, the parent company.

Control

The issue of control over day-to-day operations will also likely be covered in both the franchise and license agreement. With a franchise system, the franchiser retains control over general business operations, marketing, as well as how its services or products are delivered to the end user. A licensee is given much more freedom with regard to business operations, marketing and sales. However, most licensers do require that licensees adhere to quality assurance standards.

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