Franchise

Franchising refers to a concept in marketing, which can be used by an organization as a strategy for expanding its business. It is a business strategy for getting and keeping customers. Franchising is a marketing system for creating an image in the minds of present and prospective customers about how the company’s brand, products and services can help them. It is a method for distributing products and services that satisfy customer needs.

The concepts of “brand” and “identity” form the very core of the Franchising model of business. It is a network of independent business relationships, that allow people to share a brand identification.

A Franchise is implemented between parties knows as the “Franchisor” and “Franchisee”. The franchisor licenses its know-how, procedures, business model, brand and all other associated rights, to the Franchisee, to sell its goods and/or services. Franchising is one of the fastest and most popular means of business expansion. At the core of franchising is the licensing of intellectual property rights. The Franchisor, is a large business with a well-establish brand name, while the Franchisees are smaller businesses entrusted with the task of promoting the Franchisor’s brand by maintaining a certain level of quality in providing the goods or services of the Franchisor. Both, the Franchisor’s and the Franchisee’s acts are directed towards the common goal of maintaining and improving the quality of the brand of the Franchisor company, in the mind of the customers.

A Franchise relationship is beneficial to the Franchisor as he can take his brand to new locations and customers; which he would otherwise not be able to do. Further, it is beneficial to the Franchisee who invests his assets in an already well-established system to utilize the reputation of a pre-existing brand name, operating system and ongoing support.

Ways in which the IP should be used and its protection against misuse are some of the most pressing concerns for a franchisor. Therefore, before commencing a franchise relationship i.e. entering into  Franchising Agreements with the Franchisee, a prospective Franchisor must ensure that all the intellectual property associated with its brand, good or service is adequately protected. If the franchise is a cross-border franchise, then this often means that the Franchisor has to apply for protection of their respective IP rights in the other jurisdictions where the Franchisee operates or seeks to operate.

The franchise agreement will usually contain provisions which allow the franchisee to use the various trademarks without competing with anyone other than the other franchisees.Franchising is a common practise among well-known fast-food chains. Some of the common and well-known franchises around us are McDonald’s, Subway, Burger King and Pizza Hut.

Types

There exists a number of different types of franchising arrangements available to a business owner.

• Master Franchise

In a master franchise agreement, the Franchisee has the right to open and operate a certain number of units within a defined territorial limit. Further, unlike any other form of franchise arrangement, master franchise agreements allow the Franchisee to sell franchises to other people within the territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks and duties undertaken by the Franchisor, such as, such as providing support and training, as well as avails many of the benefits available to the franchisor, such as receiving fees and royalties.

• Area Development Franchise

As the name suggests, the purpose of this kind of Franchise is to focus on a specific geographical area, and its development vis-à-vis the brand. The franchisor enters into an Area Development Franchise to grant the Franchisee exclusive rights for a development of the brand in a particular territory. In this type of Agreement, the Franchisee has the right to open more than one unit during a specific time, within a specified area. For example, a franchisee may agree to open 5 units over a three year period in a specified territory.

• Multi-Unit Franchise

In this type of Franchising Agreement, the Franchisor grants a franchisee the rights to open and operate more than one unit.

• Single-Unit Franchise

Also known as the Direct Unit Franchise; in this type of Agreement, the Franchisor grants the Franchisee the right to open and operate only one franchise unit. This is the simplest and most common type of Franchising Agreement.

Prior Considerations

The Franchising Business Model is essentially built on intellectual property. A brand whose Trademark and reputation is so well recognised that it can afford to market it over large territories only on the basis of its logo and goodwill, is one which engages in franchising.

Trademarks and Trade Secrets are the most common subject matter of Franchising Agreements vis-à-vis IP rights. Before entering into a Franchising Agreement, the Franchisor must keep in mind certain considerations with respect to his IP.

• Identifying and valuation of IP

The Franchisor must ensure that his trademarks and trade secrets are adequately protected and enforceable. If the IP is unregistered, or unenforceable, the brand may find that its brand value suddenly deteriorating. The brand may be exposed, that could result in the need for re-branding and expose the Franchisor to claims from the Franchisees.

Further, it is important to identify and protect your IP at an early stage, especially for IP like trade secrets, because the value of these rights will be lost if they enter public domain.

In order to ensure such protection, the Franchisor must be careful to check their template franchise agreement to ensure that it details the aspects of the franchisor’s IP that are available for use by franchisees. Failure to adequately articulate the IP permitted for use by franchisees creates uncertainty, but perhaps more importantly, may cause franchisees to question the IP value, which could in turn decrease investment interest in the franchise network.

• Protect your IP across jurisdictions

Another pertinent concern for a Franchisor is that of prompt protection and registration of their IP across borders. Famous fast food chains Taco Bell and Burger King ran into serious IP related trouble upon expanding their franchises in Australia. Both companies found that their names were already in use in Australia, despite having registered trademarks in USA. Neither company could show that it had established a sufficient reputation or sufficient goodwill in Australia, nor did they have registered trademarks in Australia. Consequently, Taco Bell and Burger King were initially limited in their expansion into Australia because of earlier Australian trade mark rights.

• Monitor and Regulate Use

A franchisor’s failure to document and register it’s IP can leave the door open to third parties, including franchisees, who may seek to exploit that IP for their own purposes. One of the biggest risks a Franchisor takes while granting a franchise, is the negative impact on brand value when franchisors do not strictly adhere to the compliances and procedures provided under the Franchising Agreement. When you enter into a Subway outlet, you expect a certain standard of service, the same range of breads, topping and options. If any of these services is not up to the mark, you will leave with the impression that Subway is no longer your preferred choice, not that the Subway at XYZ Colony is not your preferred choice.

In order to ensure that the Franchisees are complying strictly with the procedures and compliances placed by the Franchisor, the Franchisors must keep an eye on the Franchisees, monitor them and regulate strict compliance.

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