Franchising and licensing

Why it matters

Franchising is a large part of the Australian small-business landscape and is heavily regulated because the power imbalance between franchisor and franchisee has historically caused harm. Getting the model right can turn a single successful outlet into a national network; getting it wrong produces unhappy franchisees, legal disputes and a damaged brand. Licensing done carelessly can hand control of your intellectual property to others or accidentally create a franchise with all the obligations that follow.

Know which one you are actually creating

In Australia the label you put on an agreement does not decide whether it is a franchise. The Franchising Code of Conduct, a mandatory industry code under the Competition and Consumer Act enforced by the ACCC, applies to any arrangement where one party grants another the right to carry on a business under a system or marketing plan substantially controlled by the grantor, associated with the grantor’s trademark or brand, in exchange for a payment. If your "licence" ticks those boxes, it is a franchise and the Code applies whether you intended it or not.

A genuine licence is narrower: it grants the right to use intellectual property, such as a brand, recipe, software or method, while leaving the licensee to run its own business its own way. The fewer controls you impose over how the licensee operates, the more clearly it stays a licence.

What the Franchising Code requires

The Code sets out obligations designed to protect franchisees. The headline requirements are a disclosure document that must be given to a prospective franchisee a set period before they sign or pay, a cooling-off period after signing, an obligation on both parties to act in good faith, rules about marketing funds and their reporting, restrictions on certain terms, and a dispute resolution process. Franchisors must also publish key information on the Franchise Disclosure Register. The Code has been amended several times and penalties for breaches have increased, so check the current version on the ACCC website or with a franchise lawyer rather than relying on what applied a few years ago.

For a prospective franchisee, the disclosure document is the single most important thing to read. It should set out the fees, the franchisor’s history, existing and former franchisees you can contact, any litigation and what happens at the end of the term. Read it with an accountant and a lawyer who know franchising.

• Disclosure document provided before signing, with a mandatory waiting period (check the current Code for the number of days).
• Cooling-off period after signing.
• Good-faith obligation on both franchisor and franchisee.
• Marketing fund transparency and annual statements.
• Information published on the Franchise Disclosure Register.
• Mediation and dispute resolution pathways.

Is your business ready to franchise?

A business is a franchise candidate when it is profitable enough that both a franchisee and a franchisor can make money from it, when its system is documented in enough detail that a stranger could run it, when its brand has value beyond the founder’s personality, and when it has been proven in at least one location you do not personally operate. Many owners discover that their business is really a good job for a talented operator, which is not the same thing as a replicable system.

Franchising is also a change of business. You stop being a café owner and become a trainer, supplier, auditor and support desk for other café owners. The set-up costs are substantial: legal documents, an operations manual, training programs and a recruitment process, often well into six figures before the first franchisee pays a fee.

Licensing as the lighter path

If what makes your business valuable is a product, a brand or a method rather than a whole operating system, licensing may suit better. A food producer can license a recipe and brand to a manufacturer in another state; a training business can license its course content to other trainers; a software developer can license its tool. You receive a royalty or fee, keep ownership of the intellectual property and avoid the heavy obligations of franchising. The trade-off is less control over quality and customer experience, so licences need strong quality standards, audit rights and clear termination terms.

Protect the asset first. Register your trademarks with IP Australia before licensing them, and make sure the licence states exactly what is licensed, where, for how long, whether it is exclusive and what happens to the licensee’s improvements.

How to approach franchising or licensing your business

1. Test the economics Can an outlet pay a franchisee a fair return and pay you a fee and still be viable? If not, stop here.
2. Prove it without you Run at least one location under a manager for a year and compare its results with your own.
3. Choose franchise or licence Whole system with control, or IP only with freedom. Get legal advice on which the law will treat it as.
4. Protect the IP Register trademarks with IP Australia; document recipes, methods and brand standards.
5. Build the documents Operations manual, training program, franchise or licence agreement, and the disclosure document if franchising.
6. Pilot with one operator Choose carefully, support closely and fix the system before recruiting more.
7. Build the support function Training, field support, supplier arrangements, marketing fund administration and compliance.

Real-world example

A Gold Coast mobile dog-wash decides between franchising and licensing

Salty Paws runs four mobile dog-wash vans on the Gold Coast, each turning over about $140,000 a year with a strong brand and a booking system the owner, Jess, built herself. Enquiries from people wanting to "buy a van" arrive weekly. She models a franchise: a franchisee would invest roughly $85,000 in a fitted van and fee, earn perhaps $60,000 to $70,000 before tax at her current volumes, and pay her an eight per cent royalty, about $11,000 a year per van. Set-up on her side, including legal documents, trademarks, the manual and training, is quoted at around $120,000. She would need at least a dozen franchisees before the model paid for itself and a support role she does not currently have.

Jess instead licenses the brand and booking platform to independent operators in other regions, who run their own businesses and pay a flat monthly fee plus a per-booking charge for the software. Her lawyer confirms the structure stays a licence only if she does not control how they operate, so she sets quality standards and audit rights but leaves pricing and suppliers to them. Three licensees sign in the first year, adding about $48,000 of recurring revenue with little extra overhead. She revisits franchising in two years with the capital and the proof the licence model gives her.

Common mistakes

• Franchising a job, not a system If the business depends on the founder’s skill or personality, franchisees will not replicate the results and will blame the franchisor.
• Underestimating set-up cost and time Legal documents, manuals, training and recruitment usually cost well into six figures and take years before fees cover them.
• Creating an accidental franchise Controlling how a "licensee" operates can bring the Franchising Code into play, with penalties for non-compliance.
• Recruiting franchisees for the fee Taking anyone who can pay fills the network with the wrong operators. Select for capability and fit; a failed franchisee damages everyone.
• Skimping on disclosure Incomplete or outdated disclosure documents are a frequent source of disputes and ACCC action. Keep them current.

KPIs to track

• Franchisee or licensee profitability The operator’s return after fees. If they are not making a fair living, the network will not grow or stay.
• Network revenue and royalty income Total sales across outlets and the fee income they generate for you.
• Outlet survival and renewal rate Share of outlets still trading and renewing at the end of term. Low renewal signals a model problem.
• Compliance audit results Brand and quality standards met across the network, from field visits or mystery shopping.
• Disputes raised Formal complaints or mediations per year. Any trend upward needs attention.

Frequently asked questions

What is the difference between a franchise and a licence?

A franchise grants a whole business system under the franchisor’s brand and control, with ongoing fees and support, and is regulated by the Franchising Code of Conduct. A licence grants the right to use specific intellectual property while the licensee runs its own business. The level of control over how the business operates is what usually decides which one the law sees.

Who enforces the Franchising Code?

The Australian Competition and Consumer Commission (ACCC). The Code is mandatory and breaches of many provisions attract significant penalties. Disputes can also be taken to mediation through the Australian Small Business and Family Enterprise Ombudsman.

Is buying a franchise a safe way to start a business?

It can reduce some risks because the system is proven, but it is not risk-free. Read the disclosure document carefully, speak to current and former franchisees, model the numbers yourself and get advice from an accountant and a franchise lawyer before signing.

How much does it cost to franchise a business?

It varies widely, but legal documents, trademarks, an operations manual, training programs and recruitment commonly add up to a substantial six-figure sum before the first franchisee is trading, plus the ongoing cost of a support function.

Key takeaways

• The law, not the label, decides whether an arrangement is a franchise; control over operations is the key test.
• The Franchising Code of Conduct is mandatory and enforced by the ACCC; check the current version for disclosure and cooling-off rules.
• Only franchise a business that is profitable for both parties and proven in a location you do not run.
• Licensing is a lighter path when the value is in a brand, product or method rather than a whole system.
• Protect your intellectual property before you let anyone else use it.