Overview differences franchising and licensing structure

FRANCHISING

LICENSING STRUCTURE

What is franchising?

What is a licensing structure?

Franchising is a method of doing business whereby one company (the "franchisor") enters into a contract with another company (the "franchisee") by which it is agreed that the franchisee receives from the franchisor, in return for payment, the right to use a business with a recognizable business concept (the franchise formula) including the trade name of the franchisor for a certain period of time within a certain territory (often exclusive).

In doing so, the franchisor ensures that the franchisees do not compete with each other.

Under a "simple" license agreement, an entrepreneur (the "licensor") grants, under certain conditions, a right of use to another entrepreneur (the "licensee") to perform a certain activity for a certain period of time and within a specific territory, or to exercise a certain right belonging to the licensor (e.g. the use of a trademark right, copyright or software).

These licenses are often non-exclusive, which means that they can be sold to different, competing companies operating in the same market.

 Other characteristics and differences

 Other characteristics and differences

1. Legal

Dutch law does not provide a separate arrangement for the franchise agreement. This means that the general rules of contract law apply. As a result, (more) value is attached to the content of the franchise agreement and jurisprudence. In many cases, however, the European Code of Honour on Franchising does apply. This sets out standards and rules of conduct that guide cooperation in the case of franchise.

1. Legal

Nor does Dutch law provide for a separate regime for the licence agreement between two companies. This means that the general rules of contract law apply here too and that the parties are free to make agreements. However, legal rules do apply to the intellectual property rights that are the subject of the license agreement. This must therefore be taken into account when drawing up the license agreement.

2. Different rights granted

With franchising, various rights are granted that belong to the franchise formula, including rights to advice and/or training via the franchisor and, in addition, often several licenses, e.g.

• on know-how (know-how on the tested product range, procurement, market research, joint advertising, logistics services, administration, automation, etc.); and
• use of a trade name and/or trademark domain name, use of recognisable colour combinations and/or designs, logos for uniformity and appearance;

In case of franchising, the method of doing business is often described in detail in a franchise manual (e.g. how the franchisor assists the franchisee with advice and training and how the franchisee is obliged to entitle his business according to the franchise formula).

2. Usually one right granted

A license agreement usually grants only one specific right. This right always relates to intellectual property rights (e.g. trademark, model, know-how, patent or software). The licensee is free to act within the limits of the agreed conditions.

3. Fees

Usually, a franchise is granted against payment of a one-off upfront fee ('entrance fee') and a periodic 'fixed' or turnover-related fee ('franchise fee'). Advertising contributions' are also often required by the franchisor.

3. Fees

Usually, a licence is granted against payment of a periodic or one-off licence fee ("royalty").

4. Scope of documents

Because several rights are granted to the franchisee under a franchise agreement, different (and often voluminous) documents are preferably also required to give a clear and straightforward form to the parties' cooperation (e.g. franchise agreement containing different license and a franchise manual, which lays down all kinds of rules and guidelines relating to the Franchise formula). These documents are inextricably linked and refer to each other.

4. Scope of documents

The licensing structure can often be designed in a single licensing agreement. A licence agreement is usually more quickly drawn up and negotiated than a franchise agreement.

5. Franchise agreement

Jurisprudence shows that a court qualifies an agreement as a franchise agreement if, inter alia, there is: a) a chain of the same shop concept, b) with the aim of increasing the recognisability of the chain, whereby c) the franchisee has the right and authority to use the franchisor's logo for the sale of goods or services. Furthermore, the franchisor (d) makes know-how, such as working methods and techniques, available to the franchisee.If a franchise structure is chosen, these elements should therefore be governed by the franchise agreement.

5. Licence agreement

Licence contracts are linked to intellectual property and come in all kinds of forms. Think of production licenses or sales licenses, but also distribution and agency agreements. franchise agreements are therefore also partly license agreements.

6. Support, guidance and control

An important feature of franchising is continuous support and guidance from the franchisor. The franchisor also retains control over the way in which the franchisee conducts its business, in order to monitor and maintain the identity and image of the franchise organisation; and carries out its task of developing the formula.

6. Support, guidance and control

Under a license, the licensor generally does not provide support and accompanying activities to the licensee. The licensor usually keeps control over the way in which the intellectual property is used, but not over the way in which the licensee conducts its business. 

7. Duty of care

Moreover, the franchisor has an independent and far-reaching duty of care. This duty of care implies, among other things, that - mid-term - financial objectives are realistic and achievable, and that the franchisees must independently support the franchisee in this respect.

7. Duty of care

A licence does not involve a duty of care as is the case with franchise. 

Some advantages for a franchisor to make to opt for franchising

Some advantages for a licensor to choose a licensing structure

1. Franchisees need to invest less capital of their own (than in the case of franchisees setting up new sites themselves) in order to expand their formula;

1. Licensing is a very suitable means to commercially exploit the reputation of a (trade) brand and to expand its business without having to invest in new locations or distribution networks or support the licensee through training, location selection or marketing.

2. Franchisee is financially independent and therefore responsible for the necessary investments. So: less risk for franchisee;

2. Licensor retains the ability to combine its own activities around its intellectual property right(s) with licensing in another market segment or country. 

3. If the franchise agreement and the franchise formula have been elaborated and imposed on the franchisee(s), then the franchisor builds a strong (trade) brand which in itself represents a certain value.

3. A licensor does not have to comply with the conditions of the European Code of Honour for Franchising. A licence does not involve a duty of care as is the case with franchising.

4. The franchisee retains considerable control over the way in which the franchisee conducts its business.

4. A licensing structure is simpler in structure and involves fewer obligations for the licensor than a franchisor has. The start-up costs are therefore lower than with franchising.

1. Franchisee remains independent but can hitch a ride on the success of the franchise formula and does not have to build a name for himself. Franchisee will have a ready-made customer potential at his disposal.

1. A licence makes it possible for the licensee to use intellectual property rights against payment of a royalty and/or to make and market certain products with them.

2. Franchisee can use the distribution network of franchisor and therefore does not have to set it up entirely on its own.

2. Licensee is normally free to choose the way in which it operates its business.

3. Based on the experience of the franchisor, the amount of the necessary investments can often be made easily understandable, so that financial setbacks can be kept to a minimum.

4. When a company becomes a franchisee of a proven successful franchise formula, a bank is more willing to provide financing than in the case of a new 'own' business concept.

5. Franchisee's investments have a reduced risk and franchisee can benefit from continuous development and research and a semi-monopoly in a given area.