Franchising extends the use of licensing to create a significantly different commercialisation vehicle. The owner of a successful business can expand without borrowing capital to develop if its intellectual property (IP) is licensed to franchisees. IP is central to capitalising on the relationship between franchisor and franchisee.
The factors that typically characterise a franchise relationship include:
Grants one or more parties (the franchisees) the right to use its trade mark and/or trade name (licensed IP)
Pays royalties and fees for the licensed rights to provide goods or services to agreed specifications controlled by the franchisor (which may include quality control and territorial restrictions)
Grants one or more other parties (the franchisees) the right to use its business systems and processes (which may also involve IP) on an ongoing basis
Financially contributes towards marketing costs and receives continuous assistance in establishing, maintaining and promoting the franchise from the franchisor
Gains rapid expansion of business with minimal capital expenditure
Gains immediate brand recognition and established business processes and products (based on the franchisor’s initial success)
Examples of franchise operations include McDonald’s restaurants, 7-Eleven, Jim’s Mowing, Pizza Hut and H&R Block tax agents.
Franchise business models
Franchising is used to describe a number of business models. Retailer to retailer is the most common; however there are other models that are also dependent on franchise relationships.
- Manufacturer-Retailer: Where the retailer (as franchisee) sells the franchisor's product directly to the public. For example a motor vehicle dealership;
- Manufacturer-Wholesaler: Where the franchisee under license manufactures and distributes the franchisor's product. For example soft drink bottling arrangements; and
- Wholesaler-Retailer: Where the retailer (as franchisee) purchases products for retail sale from a franchisor wholesaler. For example a hardware store.
All IP rights (trade marks, patents, registered designs and copyright) must be listed in a franchising agreement. This should include the way the franchisor would like the franchise to use them.
Trade secrets, technical know-how, manufacturing data and business information should be included in an operating manual or a set of guidelines.
It’s important to clearly outline which party is responsible for managing the IP and taking action to defend the IP rights if they are infringed.
It's essential for the franchisee to keep the franchisor's trade secrets confidential. Such information may be disclosed to the franchisee’s employees in order to carry out the business of that franchise.
It’s best practice for all parties to sign a non-disclosure agreement (NDA) before engaging in franchise negotiations.
Details of the franchising system (operating manual)
The franchisor must provide the franchisee with an operating manual as well as with comprehensive training. The operating manual is one of the most important means of communicating the franchised system. It should include all information necessary for actually carrying out the franchised system such as:
- quality control requirements
- inspection times
- supplies ordering
- payment of franchise fees.
The training provided by the franchisor may include the following:
- marketing training
- processing training for the sale of goods
- repair training
- general business training.
Franchising Code of Conduct
Franchise agreements are generally more complex than licensing agreements. This is mostly because the franchisor must ensure that the franchisees consistently provide high quality products and services to maintain the brand’s reputation and market value. Consequently, many countries have regulations specific to franchising. In Australia, the Franchising Code of Conduct applies under the Australian Competition and Consumer Act 2010.
The introduction of the Franchising Code of Conduct has made buying a franchise a less daunting experience as it clearly sets out the rights of the franchisee.
The Australian Competition and Consumer Commission also has a free Franchisee's Manual available on their website.
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- Published as part of IP - your business edge magazine issue 01 2017.