Franchise vs. License: Which Model is Right for Your Business?

If you’re considering expanding your business or monetising your brand, you’ve probably come across franchise and license arrangements. While these models can look similar, the legal obligations, operational control, and compliance requirements can differ significantly. Choosing the wrong model—or misclassifying your business—can result in legal penalties or operational headaches. 

In this guide, we’ll break down the differences between franchising and licensing, key considerations, and practical tips to help you decide which model fits your business. 

What is a Franchise?  

A franchise is a structured business relationship where a franchisor grants a franchisee the right to operate under the franchisor’s brand and system. Key features include: 

• Brand and Intellectual Property Use: Franchisees operate using the franchisor’s trademarks, logos, and branding. 

• Business Systems & Marketing Plans: Franchisees follow a prescribed system and marketing strategy. 

• Performance Standards: Franchisees are often evaluated against agreed criteria. 

• Fees and Contributions: Franchisees typically pay initial and ongoing fees, such as royalties or marketing contributions. 

• Legal Compliance: Franchises in Australia must comply with the Franchising Code of Conduct, including disclosure and cooling-off periods. 

What is a License?  

A license is a more flexible arrangement where the licensee gains permission to use intellectual property or brand assets, without adopting the licensor’s full business system. Key characteristics include: 

• Brand Use Only: Licensees can use the brand or IP, but operational control is generally in their hands. 

• No Prescriptive Business System: Licensees may run the business as they choose, without mandatory procedures or marketing plans – except generally there are brand guidelines to ensure brand consistency. 

• Limited Fees: Fees, if any, are often limited to royalties or usage payments. 

• Minimal Compliance Obligations: Licensing arrangements are less regulated than franchises. 

Why Getting It Wrong Can Be Risky 

Some businesses may accidentally operate as a franchise without intending to. This can happen when: 

• A “license” imposes operational rules, marketing obligations, or audits. 

• Intellectual property and brand systems are controlled by the licensor. 

• Fees and performance criteria are imposed on the licensee. 

If your business meets the legal definition of a franchise, the Franchising Code of Conduct applies, and non-compliance can result in civil penalties and legal action. 

How to Decide Which Model Suits Your Business 

1. Assess Your Goals: Do you want to tightly control operations, branding, and marketing (franchise), or allow flexibility for independent operators (license)?  

2. Evaluate Legal Obligations: Franchises require compliance with the Franchising Code; licenses do not. 

3. Consider Operational Complexity: Franchises require monitoring, training, and evaluation systems; licenses are simpler to manage. 

4. Review Fees and Contributions: Determine whether ongoing royalties, marketing funds, or mandatory fees fit your model. 

5. Seek Legal Advice: A franchise lawyer can review agreements and help you avoid accidental franchising. 

Case Study: Turning a Franchise Trap into a Legally-Compliant Licence Model  

We recently worked with a fast-growing real estate brand that wanted to expand nationwide. Their vision? Create a network of independently operated offices under their banner - but without the legal baggage of the Franchising Code of Conduct. 

At first glance, they assumed a licensing model would be simpler. But when we reviewed their proposed structure, it was clear they were heading straight for a franchise trap. Their proposed model included things like: 

• Prescribed systems and marketing plans 

• Mandatory training and operational rules 

• Ongoing performance monitoring 

• Fixed fees tied to revenue 

In legal terms, they were walking and talking like a franchise - even if they were calling it a license. 

If they had launched as-is, they would’ve been caught under the Franchising Code - and exposed to significant risks like: 

• Mandatory disclosure obligations 

• Cooling-off periods 

• Civil penalties for non-compliance 

• The potential for franchisees to terminate or sue if things went south 

So, we rolled up our sleeves and helped redesign the model. 

We stripped out the prescriptive elements that triggered the franchise definition, repositioned their support framework, and rewrote their agreements to ensure that licensees retained operational control. We also helped set clear brand use guidelines without enforcing a business system. 

The result? A compliant licensing model that gave them flexibility to grow, protected their brand IP, and kept them out of the Franchising Code. 

They avoided a regulatory nightmare - and launched a legally unbreakable brand licensing network that’s now thriving across multiple states. 

Key Takeaways 

• Get Legal Advice Early: Consult a franchise lawyer before entering any agreement to ensure your contract reflects your business model and complies with the Franchising Code. 

• Understand Your Model: Determine whether your business is a franchise or a license—misclassification can lead to penalties and operational complications. 

• Review Obligations Carefully: Examine all disclosure requirements, fees, marketing contributions, and operational controls to understand your legal and financial responsibilities. 

• Assess Operational Control: Decide how much control you want over branding, systems, and training, as this will guide whether a franchise or license structure suits your business. 

• Plan for Long-Term Success: Choose a model that aligns with your growth goals, protects your brand, and ensures legal compliance, avoiding surprises and penalties in the future. 

Next Steps

If you’re unsure whether your business should operate as a franchise or a license, or want to avoid accidentally creating a franchise, our team at O*NO Legal can guide you.  

Book a free 10 min consultation today to ensure your business structure is compliant, legally sound, and aligned with your growth goals. 

Frequently Asked Questions (FAQ)

• How do I know if my business is a franchise or a license?

  You need to review your agreements and operational setup. Key factors include the use of trademarks, prescribed business systems, fees, marketing obligations, audits, and performance criteria. If your arrangement meets the legal definition of a franchise, the Franchising Code applies, even if you thought it was a license.

• What risks exist if I misclassify my business?

  Operating as an “accidental franchise” without complying with the Franchising Code can lead to civil penalties, fines, and legal disputes. Misclassification can also affect disclosure obligations, cooling-off periods, and operational requirements.

• Do I need a lawyer to set up a franchise or license agreement?

  Yes. Engaging a lawyer early ensures your contract accurately reflects your business model, complies with legal obligations, and protects your brand. A franchise or licensing lawyer can help you avoid accidental franchising and structure agreements properly.

• Can I switch from a license to a franchise later?

  Yes, but the transition requires careful planning. You’ll need to comply with all franchise regulations, update disclosure documents, and establish systems and controls consistent with the Franchising Code. Legal guidance is essential to manage this change smoothly.

Jonathan Green – Partner, O*NO Legal

Jonathan Green is one of the Partners at O*NO Legal with a strong passion for both the real estate and legal industries. With over 15 years of experience, he has led his own firm, worked for a large national law firm, and served as Partner and Director of a busy Victorian real estate agency. As a Licensed Estate Agent, Jonathan understands the real-world challenges his clients face, having worked directly within the industry. After selling his real estate business in 2021, he returned to full-time legal practice, combining his expertise in law and real estate.

Jonathan specialises in commercial law, property transactions, developments, rent roll sales, and leasing and conveyancing matters. He holds a Bachelor of Laws from La Trobe University, a Bachelor of Arts from the University of Melbourne, and is a Graduate of the Australian Institute of Company Directors.

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.