Franchising agreement - Licensing agreement Is there a difference?

Morne Cronje

Franchising has become a popular business model across the world and over the years, South Africa has produced home-grown franchises such as Steers, Wimpy Sorbet, to name but a few  - which have become household names. 

Equally, there are a number of license-based agreements which offer businesses an opportunity to offer specific products or services to their market. 

Morne Cronje, Head of Franchising at FNB Business says, “It is essential to understand the difference between a franchising agreement and a licensing agreement, especially when seeking funding from a financial services provider. Each business model is governed by a completely different agreement or contract and they operate in a unique way.”

Cronje says some of the key distinguishing factors are as follows:

Franchising

• Franchising can be best described as a duplication of a specific business model, which is governed or controlled by means of a Franchise agreement. The Franchisor holds all rights, including the business model.  
• Governance: Three important documents are fundamental when running a franchise business, namely; a Franchise agreement, Disclosure document and the Operations or training manual. The documents specify standard operating procedures for the franchise as well as its products.
• Support for franchisees is standard. From training to marketing, everything is usually rolled out in a similar manner.

License Agreements

• A License Agreement is predominantly based on selling or providing a specific product or service. Typical examples would be outlets which are licensed to sell Apple products. 
• Governance is usually prescribed as per license agreement. For instance, licensees often sell other goods which are not necessarily offered by the licensor. 
• Support is directly linked to a specific product or service rather than the overall business. Any form of training will be limited to the offering which is covered by the licence agreement.

“Franchising has become quite familiar in SA and financial institutions have very clear requirements when requested to provide funding. Even though licensing agreements are becoming a norm, their contracts often depend on the licensor,” concludes Cronje.