Australia: Franchisee Or Licensee?

Mondaq:

Many existing and prospective franchisors are currently concerned with the effect that the impending amendments to the disclosure requirements of The Franchising Code of Conduct (the Code) will have on their businesses. These amendments, not yet in final form, but anticipated for introduction as early as July 2007, are likely to spell increased compliance costs for franchisors.

Unfortunately for franchisees, rather than allowing these costs to chew up their profit margins, many franchisors will be considering revising their fee structures to allow the slack to be taken up at the lower end. The reality of this situation is forcing many, particularly smaller and prospective franchisors to seek advice as to how they may be able to get around the requirements of the Code. One way that this may be achieved is by granting licenses rather than franchises.

It is theoretically possible to set up a quasi-franchise system that can be licensed out for a fee and that will avoid the scope of application of the Code. The basis for this is found in the legal distinction between a ‘franchise agreement’ as defined under the Code and a license. Due to the difficulty in determining the boundary of the legal definition of a franchise, prospective licensors must be very careful in regard to both the drafting of any documentation they provide and the nature of any interaction that they have with their licensees. As a separate practical consideration, the marketability of the proposed licensed system relative to running it as a franchise must also be assessed.