If you want to take your business to the next level, franchising provides a less capital-intensive way to grow nationally and internationally.
The franchisee promotes your brand by following your successful proven path, while you provide support with marketing, access to trusted suppliers, systems, and other resources. Training becomes a core part of your business activity because you are helping your franchisees to build a business that replicates yours.
If you have a successful business which you want to expand consider whether:
- franchising is the right step for you personally?
- you have the right skills and resources.
- your business is at the right stage for franchising.
- the business is suited to franchising.
An important issue is whether your brand is distinctive and legally protectable. This is discussed in my forthcoming book: Brand Tuned – The new rules of branding, strategy and intellectual property.
Although the points mentioned above are all important, here I focus on the fundamental question whether your brand is legally effective.
One role of a brand is to function as a barrier to entry against competitors. This is not necessarily the yardstick by which designers create a visual identity. Therefore, before considering franchising, or a business exit, assess how distinctive your branding is legally, and what issues you might face when protecting its intellectual property (IP).
Your brand name and designs determine how memorable you are and impact your ability to attract sales. If the brand doesn’t work as IP, it will be incapable of uniquely identifying your business long term. You will encounter problems protecting it, especially in key markets overseas.
Unless the brand is legally aligned to your business strategy, it could result in wasted time and cost down the line. For example, Zumba needed a highly distinctive name to sell its wide variety of goods and services internationally. A weaker, descriptive name would not have enabled it to roll out the business as it has done. The company would have hit problems securing registrations in different countries. It would have needed different branding in some countries, and its overseas trademarking experience would have been messy and costly.
What Is IP?
IP is an umbrella term that refers to five legal disciplines which impact creations of the mind:
- designs, and
- confidential information.
The creations covered include:
- written materials
- secret recipes
- brand names
- and more.
Each IP law governs different subject matter, and sometimes several laws impact a creation. For example, copyright, designs and trademarks are all relevant to logos.
IP such as know-how, and trade secrets relies on confidentiality laws for protection.
Know-how, such as the accumulated skills and experience that resides in your business should be turned into an asset of your company by properly capturing it in your systems and processes. Once preserved this know-how will be held in your business, and is at less risk of being forgotten, or lost, such as when an employee leaves your employ.
Systemising and updating your processes to preserve your company’s know-how also happens to be what is necessary to have a well-functioning business that can run without you. This systemisation work is critical in enabling you to run a better business. Doing so frees up your time and resources. It also enables you to prepare the all-important ‘operations manual’ you need to franchise your business.
Why Is IP Important For Your Brand?
Franchising requires a big capital outlay. People often take out a sizeable loan to set up a franchise. In practice, they don’t dedicate a budget to fundamentals such as assessing their IP and securing necessary protections.
People sometimes jump into franchising hastily both feet first, disregarding fundamentals such as addressing their IP. They don’t review their brand assets for distinctiveness from a legal perspective, and risk incurring far greater costs undoing ill-considered actions.
A do-it-yourself (DIY) trademark registration is not the right foundation on which to build a franchise operation, even if you only franchise in the UK. Litigation can and does arise, and the brand is vulnerable if its trademark specification is inadequate. Many DIY registrations are bare bones, miss essential classes and are poorly drafted. They do not adequately protect the business.
Nor is it widely appreciated, even by business lawyers that a trademark registration in the UK and EU does not protect you against trademark infringement claims. For example, Microsoft had an EU trademark registration for SkyDrive but was sued by Sky. The court decided it was infringing on Sky’s brand so that Microsoft had to rebrand to OneDrive.
Your entire business foundation rests on legally owning your brand name and assets.
One business I know had to rebrand shortly after embarking on a franchise operation. Rebranding is never easy or affordable but is made doubly costly if you have already embarked on franchising and prepared your franchise brochures and other collateral.
A recent report by CompuMark, a Thomson Reuters company in PR Newswire: Trademark Infringement Rising Year On Year revealed that 85% of brands experienced trademark infringement in 2019, showing a steady upward trend from 81% in 2018 and 74% in 2017.
Intangible assets are more important than ever to business, yet many entrepreneurs are unaware of the significance of IP. Leaving IP until after a brand is created risks building it on a foundation of sand.
Failing to review your IP runs the risk of costly litigation spanning many years. This would jeopardise the sale of the business or reduce its price and would adversely affect your franchising journey too.
So, focus on improving your business before taking any steps towards franchising.
Franchising And Licensing
Licensing your business format and IP, is essentially what franchising involves.
Licensing is just the legal name for what’s involved to franchise a business. Indeed, licensing is involved in many other well-known ways of monetising IP such as brand licensing, character merchandising, and know how licensing.
The difference between franchising and licensing a business format is simply that franchising is an established way of licensing a business format.
Franchising has its own rules and bodies that oversee the activity. However, it is perfectly possible legally to achieve the same end as franchising by using a less formal arrangement to license your business format. However, the laws of some countries, such as the USA, disallow licensing of business formats.
In the USA franchising is heavily regulated and fines are imposed on any business that avoids the regulations by licensing its business format outside a franchising arrangement.
Franchising is the only way to license your business format in the USA and other countries that disallow a less formal approach of licensing your business format. In such countries you cannot escape the regulations: if you are effectively franchising your business by using a simple licensing arrangement. The regulations will deem you to be franchising.
On the Azrights blog I’ve written about this: Licensing and Franchising -What is the Difference and Does it Matter?
Licensing your business format instead of franchising it is an option for businesses located in the UK as the UK franchising regulations do not disallow informal arrangements. You could therefore test the suitability of franchising by licensing your business format initially instead of franchising it.
There are advantages in licensing your business format as an interim solution before opting for franchising because there are few formalities involved.
The upfront costs being lower mean you can focus your budget initially on building a sturdier business, putting your IP in order, and then reap many of the potential gains that franchising offers by licensing your business format to interested third parties.
Laying The Groundwork For Licensing
By having your branding reviewed, and protecting your IP appropriately, you will be better equipped to fend off problems that successful brands invariably attract.
Licensing is relatively simple once you’ve sorted out your IP and transferred it to a holding company. That company grants licences to use its IP to any licensees you appoint.
Putting your IP in a holding company is a worthwhile action to take anyway to shield your valuable IP assets and ring fence them, in the event of litigation or insolvency.
With this groundwork in place, you can appoint a licensee using an arrangement loosely based around franchising that is less prescriptive. You can decide how to grant permission to third parties to use your business format taking as much control as you want.
The licensing agreement will impose many of the same controls as a typical franchising deal, such as requiring your licensee to comply with your established ways of running the business as stipulated in your operations manuals. If you want, you can disallow the slightest difference in the business format in case it damages your brand. You can include quality control provisions and sanctions against a licensee who attempts to break out and introduce their own ideas.
The arrangement leaves you in control of the brand, and on how the licensee runs the business.
A benefit of trying out licensing is that you can start with a licensee you know and trust and use a more flexible route fashioned to suit your requirements. You will learn what is involved to train licensees in the way you operate your business.
Giving someone else access to your proven systems, processes and IP means you get to test the waters in real life, identify issues that need to be addressed with your first licensees and iron out kinks before embarking on franchising and the larger associated costs involved.
Having tested the arrangement nationally using this simpler, cheaper approach to achieve similar ends means you prepare for franchising in a way that both improves your business anyway, gets your business ready for franchising, and increases your revenues.
If you aspire to have an international franchise, it is doubly important to review your IP and give yourself time to put your brand on a firm footing. To enter markets worldwide needs an international trademark strategy.
Whether you decide to franchise or to grow organically, I hope this article will have raised your awareness of the importance of having your IP and brand professionally assessed and protected.