Are you running an accidental franchise?
O*NO! You’ve run into an issue and you aren’t sure if you’re involved in a franchise or license arrangement. The two are commonly mistaken for one another and working out which you are involved in can be a difficult task, especially trying to determine if the Franchise Code applies to you or not. Not to worry, today’s blog is not only all about how important it is to determine which arrangement applies to you and why it matters.
Why is it Important to Know the Difference?
It is super important to know which type of agreement you are involved in as it is not uncommon for a licensor to be operating an ‘accidental franchise’, even if they haven’t voluntarily or intentionally entered into a franchise agreement.
If you are running an ‘accidental franchise’ then you are most probably not complying with the Franchise Code. The cost of getting this classification wrong is increasing with larger penalties being introduced to the franchising law.
How Do I Tell the Difference?
There are a multitude of factors that can help point you to which type of arrangement you are apart of. Some of these factors include (but are not limited to):
How a trade mark/intellectual property is being used within the agreement;
If there is a “system” or “marketing plan” in place;
Whether there is freedom to choose business operation systems or not;
If there is performance criteria and evaluation in place;
What fees are in place and what they are for;
If there is a right of audit involved;
If there is any price control in place;
If there is mandatory training for selling the good/service in place; and
Restrictions surrounding selling goods and services.
There is much more to the determination than the above and it will almost definitely vary on a case by case basis, hence why franchise and license agreements can be such a grey area.
What Does This Mean for the Future?
Many real estate groups are now offering licensing arrangements so they are not under the super strict requirements of the Franchise Code. This is a legitimate strategy, provided of course that it a true licence arrangement. No matter what you call your contract or relationship, if it meets the ‘test’ of what makes a franchise a franchise as set out above, then it will be classified at law as a franchise.
If you are unsure on which arrangement your business dealings fall under, it is best to determine this quickly because if you get it wrong and the law determines you are a franchise, then you will fall foul of the Franchise Code and have heavy penalties coming your way.
Your everyday dealings (and even your entire business outlook) could change off the back of this information. If you have any doubt about which agreement your business is subject to, we recommend looking into it as a matter of priority.
Key Takeaways
It’s extremely important to know whether your business is on the ‘franchise’ side of ‘licence’, as different laws and rules apply
it is important to know this incase you are ‘accidentally’ operating a franchise – meaning you haven’t voluntarily or intentionally entered into a franchise agreement
There are a multitude of factors that can determine which agreement yours falls into and these can differ on a case by case basis
Some factors to consider include the use of trademarks/IP and systems and marketing plans, the implementation of performance criteria or evaluations, the use of fees, audits and price controls, and the restriction to and training around selling goods and services.
Remember – no matter what your contract states, if your business meets the test of being a ‘franchise’ it will be considered a franchise under the law and you must comply with the Franchise Code, or face large penalties.
Next Steps
If you are thinking about licensing your brand and want to keep on the ‘licence’ side of things, book a free 10 minute chat with our team by clicking here.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.