Franchise vs License/Distributor. Is it a Franchise?

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Often people ask me whether the business they are looking at is properly classified as a “license and/or distributor arrangement” or is it actually a “franchise”.

This classification is extremely important given that if it is a “franchise”, it will be heavily regulated with rights, obligations and restrictions imposed on and/or granted for the benefit of the franchisor and/or the franchisee.

There are numerous types of franchise models, from: fixed site to mobile site operations; fixed fee/s to royalties being payable; part time to full time operations; single owner operators to having multiple employees; and/or being established as business format model to models that just focus on the provision of specific products or services under a Trade Name. Given the above diversity, this can add to the confusion of whether a license and/or distributor agreement goes above and beyond to be legally classified as a “franchise.”

The Franchising Code of Conduct, the main mandatory source of law regulating franchising in Australia, effectively sets out that it does not care whether you call or believe something is or is not a franchise, if the arrangement you have meets the franchise characteristics set out in the Franchising Code of Conduct (those being along the lines of the below characteristics), then you likely have a franchise and a consequently a range of rights, obligations, penalties and/or benefits apply, and often can not be waived or written out of your contractual agreements.

Following on from the above, a franchise should generally meet all the following characteristics:

1. a right is being granted by one party (“the franchisor”) to another (“the franchisee”) to carry on the business of offering, supplying or distributing goods or services;
2. the franchisee is required to operate under a system or marketing plan substantially determined, controlled or suggested by the franchisor or it’s associate;
3. the franchisee’s business must be substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor or its’ associate; and
4. a requirement exists to make payment/s to the franchisor or its associates, other than wholesale costs or payment of market value for certain items to a franchisor or its associate.

Because of the potential implications of being a franchise, we strongly recommend that you have a lawyer specialized in franchising (we always recommend you get their specific franchising experience here) helping you work through this very important classification.

Please note this brief update, does not purport to be comprehensive advice relevant to your circumstances. Consequently specific legal advice for each of your circumstances should be obtained first before taking or not taking any action in respect to this area.