Both options let another person use your brand and system. The real difference is not the name of the agreement, but whether it meets the legal definition of a franchise under the Franchising Code of Conduct. Many deals sold as licences are actually franchises under the law.
A licence lets someone use something you own, like a brand, product, or intellectual property. A franchise lets someone run a business using your system and under your control, with ongoing responsibilities for both sides. Franchises are regulated by the Franchising Code of Conduct.
The main difference is about control and systems. If you tell the other person how to run the business, set the methods, standards, presentation, or pricing, and charge them for it, you are probably franchising, no matter what the agreement is called.
| Licence | Franchise | |
|---|---|---|
| What is granted | Right to use specific IP — a brand, product or process | Right to operate a business under your system |
| Control over operations | Limited — usually quality standards only | Substantial — methods, standards, training, reporting |
| Ongoing support | Typically minimal | Expected and usually contractual |
| Regulation | General contract and IP law | Franchising Code of Conduct, enforced by the ACCC |
| Disclosure obligations | None specific | Disclosure Document, Information Statement, ongoing updates |
| Penalties for non-compliance | Contractual remedies | Civil penalties, infringement notices, ACCC enforcement |
Whether an arrangement is a franchise depends on how it actually operates, not what it is called. Some businesses use licence arrangements because they appear simpler, cheaper or involve fewer compliance obligations, while others may use them in an attempt to avoid the requirements of the Franchising Code.
However, if the arrangement meets the legal definition of a franchise, the Code can still apply regardless of the label used. In that situation, the business may effectively be operating as a franchisor without having complied with required disclosure and other obligations, which can create significant legal and financial exposure.
If the choice between a licence and a franchise is being driven primarily by cost, convenience or a desire to reduce regulatory obligations, obtain specialist legal advice before proceeding. Getting the structure wrong can be far more expensive than setting it up correctly from the outset.
Licensing works well when you want another business to use your brand, intellectual property, product, technology or process, but you do not intend to control the way that business operates day to day.
A good example is brand licensing. Companies such as Disney license characters, logos and other intellectual property to manufacturers that produce products such as clothing, toys, stationery and homewares. The manufacturer already knows how to run its own business; Disney is licensing the right to use particular intellectual property subject to agreed brand and quality standards.
The Virgin brand has also been used across a wide range of businesses through licensing and brand-partnership arrangements. The key distinction is that the operator is generally running its own established business and using the licensed brand or intellectual property, rather than being given a complete business system to follow.
Licensing can therefore make sense where:
A simple way to think about it is: a licence gives someone the right to use something you own; a franchise generally gives them a business system to operate.
Franchising is best when the value comes from the whole business system. It is important when you want every location to be consistent and give customers the same experience.
If your brand’s reputation depends on how the business is run, licensing is not the right choice. Giving brand rights without control often leads to problems for both parties.
A genuine licence will usually be cheaper and simpler to establish because it does not require the same disclosure, documentation and ongoing compliance obligations that apply to a franchise. However, those savings only exist where the arrangement is truly a licence in substance, not just in name.
The risk arises when a business creates what is effectively a “Clayton’s franchise” — an arrangement called a licence, but which operates much like a franchise. This can happen where the licensor controls branding, systems, pricing, marketing, operating procedures, customer experience or other significant parts of the licensee’s business.
In that situation, the owner may have taken on many of the practical features of franchising without the legal protections and compliance framework that should accompany them. Rather than reducing risk, the structure can increase it significantly because the arrangement may still be caught by the Franchising Code while the required disclosure and compliance steps have not been followed.
For this reason, licensing should not be used simply as a cheaper way to achieve the same level of control as a franchise. If the commercial model requires substantial control over how another person operates their business, franchising is usually the safer structure to assess properly from the outset.
Yes, and this happens quite often. Owners may begin with a few licensed operators, then realise they need more control and consistency, so they switch to a franchise system.
It is harder to convert a licence to a franchise than to start as a franchise from the beginning. Existing licensees need to sign new agreements with full disclosure, and some may not like the extra obligations. If you think you will franchise later, it is usually cheaper to start that way.
Think about what you are really offering. If it is a brand, product, or technology, licensing might be right. If it is a way of doing business, it is a franchise and should be set up as one.
Three questions that usually settle it:
Absolutely not. Whether an arrangement is a franchise depends on its substance rather than its label. If it meets the Code's definition, the Code applies and you would be a franchisor operating without the required disclosure, which is high risk.
No. A licensee has the right to use specific intellectual property but generally runs their own business in their own way. A franchisee operates a business under the franchisor's system, with the support and the obligations that come with it.
Not if the arrangement is genuinely a licence. If it meets the definition of a franchise under the Code, disclosure obligations apply regardless of what the agreement is called.
It depends on what you are trying to scale. Licensing can be quicker and cheaper to establish because it generally involves fewer compliance requirements, but it also gives the brand owner less control over how the other business operates.
Franchising usually requires more work and investment upfront, but it provides a clearer structure for growth, with defined systems, training, support, standards and responsibilities. This helps protect consistency as the network expands.
A franchise can also be more attractive to a prospective buyer because there is generally greater certainty around what they are buying, how the business is expected to operate, what support will be provided and what rights and obligations apply. The Franchising Code and formal disclosure process also provide an additional level of transparency and protection that is not usually present in a simple licence arrangement.
For businesses that want to grow quickly while maintaining a consistent customer experience and protecting the brand, franchising is often the stronger and more scalable model.
Whether an arrangement is a franchise depends on its specific legal terms. This page gives general information, not legal advice. Talk to a lawyer with franchising experience before making any decisions.
The free Franchise Assessment will tell you whether your business suits franchising — and if it does not, we will say so.
