Franchising is a business strategy whereby a franchisor (or founder/developer of the business) licenses his or her procedures, intellectual property, marketing, general know-how, and the rights to sell branded products and services to a franchisee.
McDonald’s is a well-known example of a franchise. When a person purchases a McDonald’s franchise, he or she is licensing the entire business concept in exchange for fees and royalties back to the McDonald’s Corporation. The franchisee, in return, has the benefit of running a “business in a box” whereby the marketing, the procedures, the systems, are created for them. They are able to sell products and services under a brand with established good-will and name recognition, and they get access to trade secrets of the franchise.
However, the real crux of a successful franchise agreement depends on having a strong intellectual property plan in place. As such, those considering expanding into a franchise model to license their current business model out to others should keep in mind the following:
- Any franchise agreement you create should clearly spell out the authorized use of intellectual property, including all trademarks, copyrights, and trade secrets. Your name and branding are on the line, and you want to be very specific about how your “IP” should be used and any restrictions or conditions that you wish to place on the use. It’s important to spell out all of your terms from the start to weed out any franchisees who may not be willing to comply.
- Federal registration of any trademarks and copyrights is key. Franchisees will want the peace of mind knowing that wherever they are located in the country, they will be protected from competitors. If you’ve yet to federally register your marks, now is the time to take care of it.
- It should be made clear to the franchisee in all agreements the importance of maintaining the good reputation of the business. Because the franchisee is being afforded the right to use the intellectual property of the franchise, he or she has a responsibility to operate in such a way that will not result in the tarnishment of the brand. An attorney can help outline specific terms that can help to achieve these goals without being too restrictive on the franchisee’s ability to run the business.
- Both parties should start with the end in mind. It’s a reality of life that franchises fail or may need to be terminated for a particular reason. As such, there should be a clear understanding as to what happens if or when the franchise agreement is terminated. For example, the license to use the intellectual property should end and any future business that the former franchisee opens should not be set up in such a way to make customers think there is still an affiliation.
If you are exploring your options for turning your business into a franchise, it can be helpful to work closely with an attorney who focuses on intellectual property from the start. If you have questions or you need assistance getting started, please contact us at 888-666-0062.
DISCLAIMER: The information contained in this article is for informational purposes only and is not legal advice or a substitute for obtaining legal advice from an attorney.