Franchising and IP

If you are the owner of a successful business and you want to expand without borrowing capital to develop, you can license intellectual property (IP) to franchisees.

Your IP is your most powerful tool in the franchise negotiation process. It's important to consider protecting all forms of IP and your unique business methods. This assures a potential franchisee (buyer) and is an effective business insurance for you as a franchisor (seller).

Franchising is used to describe a number of business models. The most common is retainer to retailer. But 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 dealerships.
  • Manufacturer-Wholesaler: Where the franchisee under license manufactures and distributes the franchisor's product. For example soft drink bottling arrangements.
  • Wholesaler-Retailer: Where the retailer (as franchisee) purchases products for retail sale from a franchisor wholesaler. For example a hardware store.

The factors that typically characterise a franchise relationship include:

  • licensing IP: in return for an agreed payment, the franchisee is allowed to use the franchisor’s IP rights
  • an ongoing relationship: the relationship involves multiple sales of the franchised product or service, with the franchisor giving continuous assistance to the franchisee in establishing, maintaining and promoting the franchise
  • the manner of operating: the franchisee agrees to follow instructions for operating the franchise as set by the franchisor, which could include quality control and territorial restrictions.

Franchising agreements

Confidentiality

It's essential for the franchisee to keep the franchisor's trade secrets confidential. Naturally, 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 before engaging in franchise negotiations.

IP rights

All IP rights (patents, trade marks and registered designs) 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.

Clearly outline which party is responsible for managing the IP and taking action to defend the IP rights if they are infringed.

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 the 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

The introduction of the Franchising Code of Conduct has made buying a franchise a less daunting experience. It clearly sets out the rights of the franchisee.

Also, the Australian Competition and Consumer Commission has a free Franchisee's Manual available on their website.

Last updated: 
19 March 2016