Contractual Agreements to Maximize Gains - Franchising Agreements
One of the most interesting ways of commercializing your IP Assets is by entering into a Franchising Agreement. This Section briefly presents the “what, why and how” of Franchising, as well as a few things to remember in order to better understand the functioning of a franchising agreement and hopefully to help you decide on whether you want to become a Franchisor or a Franchisee … or not.
Franchising is a special type of licensing agreement, that allows for business expansion and product distribution without “reinventing the wheel”. This is because it enables the replication of a particular business format that has already been shown to be particularly successful. The precise definition of “Franchising” may vary from country to country.
However, these are key elements that characterize a franchise:
- The Franchisor licenses to one or more Franchisees the right to use its intellectual property rights (and more in particular: its trademark and know-how);
- The Franchisee in return will pay royalties (and often also a lump sum at the beginning of the agreement) to the Franchisor;
- The Franchisor provides assistance to Franchisees (for example, by sharing the necessary know-how, training them on selling techniques, windows dressing, account keeping, etc.);
- The Franchisor enjoys significant control over the Franchisee’s operations (and in particular over the way in which the Franchisees use its trademark).
In other words, the Franchisor who has developed a particularly successful business model, agrees to expand its business by granting to various Franchisees, in different locations, the right to replicate its method of doing business for a defined period and in exchange for payment of a financial consideration (often consisting of a lump sum and recurrent royalties). As part of the contractual package, the Franchisor licenses to the Franchisees the right to use its IPRs that systematically include trademarks, copyright, trade secrets and know-how, and in many cases also industrial designs and patents. The Franchisees will operate under the control of the Franchisor and in line with its directives. The Franchisor will also provide training and assistance to the Franchisees.
Franchising is generally a very interesting option both for the Franchisor and for the Franchisees. A Franchisee saves time in the development of a business from scratch, and will benefit from the Franchisor’s goodwill and reputation as well as the use the intangible assets of the Franchisor, including its trademark and logo. On other hand, the Franchisor benefits from an expansion of its business to other geographical areas with limited investment, while continuing to maintain a significant degree of control over the way in which the Franchisees carry out the business. The other significant advantage for the Franchisor is represented by the often very substantial revenues generated by the franchising agreement.
Does it always work?
While Franchising might sound like a tempting option, it is not always a guaranteed model for success. Firstly, it might not be suitable for all types of businesses. Secondly, the trademark of the Franchisor should be sufficiently well-known to immediately attract customers for the Franchisees. Before entering into a Franchising agreement, the Franchisee should make sure to carry out a thorough feasibility study. The Franchisee should keep both short terms and long terms goals of its organisation in mind and analyse if the franchise model will be of benefit. Many countries have specific legislation on Franchising, and this might be quite stringent. Franchising requires also strict monitoring, from the Franchisor’s viewpoint: even a small incidence of negligence or poor business conduct may have a severe impact on the Franchisor’s name and goodwill, and of course, the value of the Franchisor’s IPRs. Thus, both parties need to BE CAUTIOUS!
The Franchisor enters into a written agreement with its Franchisee/s for a fixed duration, whereby in exchange for monetary compensation, it provides them with the right to use:
- Its trademark and logo,
- Its technical know-how,
- Its Trade Secrets,
- Other possible intellectual property rights.
The Franchisor will also:
- Provide the necessary training to ensure that each Franchisee is capable of running the business in close compliance with the guidelines and instructions of the Franchisor; and
- Exercise strong monitoring and control over the Franchisees’ operations.
In virtually all Franchising agreements, the Franchisor establishes a very comprehensive “Manual of Operations” describing in detail every single aspect of the Franchisees’ way of implementing their business. Training on the Manual will be periodically organized, and “surprise visits” may be carried out by representatives of the Franchisor to ensure full compliance with all the instructions contained in the Manual.
- Do a due-diligence on a prospective Franchisee or on your potential Franchisor.
- Draft a detailed Franchising Agreement covering all clauses described in Section C.2 on Licensing Agreements, adding all relevant specific provisions relating to Franchising (e.g.: selling techniques, window dressing, specific duties of personnel, forms and types of control exercises by the Franchisor, etc.). Make sure you comply with the legislation of the countries in which you operate.
- Ideally, you may use one uniform agreement for all your franchisees. However, in particular cases, you may also decide to customize your contract to the specificities of the geographical area and/or of the Franchisee.
- Keep a regular check on Franchisees’ operations. Random audits or surprise visits may be considered to ensure compliance with quality standards.
- Provide regular training and support to franchisee..
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