What’s the difference between a franchise and a licence? A franchise exists between the owner of an identifying trademark and the operator of a business using the trademark when:

  • The Franchisee engages in offering, selling or distributing goods or services under a marketing plan or system, prescribed in substantial part by the Franchisor
  • The Franchisee’s business is substantially associated with the Franchisor and the Franchisee pays a fee to the Franchisor or an affiliated party, directly or indirectly, in order to engage in the business

The first of these conditions exist when the Franchisor

  • Provides the Franchisee with advice and training
  • Retains significant control over the conduct of the Franchisee’s business, grants the Franchisee an exclusive territory, or requires the Franchisee to purchase or sell a specific quantity of the Franchisor’s goods or services.

A simple test determines whether the Franchisee’s business is substantially associated with the Franchisor: if the former uses the latter’s trademark to identify its business, it is substantially associated with it.

 

As for fees, they include payments made by a Franchisee to a Franchisor when signing a franchise agreement and payments made for training and assistance, royalties or inventory. Business relationships that do not satisfy these conditions may be licensing arrangements, distributorships, dealerships, or any one of a variety of other business relationships.

 

The key question is not whether the business entities entering into the arrangement intend to establish a specific relationship (e.g, a licence rather than a franchise); the key is whether they operate independently, even though one buys and sells goods produced by the other under a trademark.

 

The relationship between Franchisor and Franchisee, by way of contrast, is a dependent one, as evidenced by the arrangements regarding marketing, training, and the like.

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