Oftentimes, people see the successful registration of their trademark as the be all and end all of the trademark procurement process, and rarely go on to make full use of the marks once they have claimed ownership. Yes, they may now have a profitable brand in hand, but how can they leverage it?
By selling, licensing or franchising, of course!
Once you have created your trademark and built your business up to a level where your products or services are recognised by the public and valued for their exceptional quality, you can choose to sell the trademark – together with the reputation of the mark – to the buyer with the highest offer (“selling”).
Alternatively, you can give permission to others to use your mark and collect an annual licensing fee from them (“licensing”), or allow them to use your trademark, business concept and characteristics of your business and collect a franchise fee and licensing fee from them (“franchising”).
As the act of selling a trademark together with the business does not require substantial elaboration, this article will focus more on the issues surrounding franchising and licensing.
Why Franchise?
Businesses expand effectively and quickly around the world through the franchising system. Many local businesses have taken this step to develop their business and create a greater awareness of their trademark overseas.
Take for instance, the Malaysian footwear brand, Lewré. The company started its business in 1997 and now, through active franchising, the retail shoe outlet and brand name are present in 25 countries, including fashion capitals London, Paris, Milan, and New York.
Another local franchise would be the well-known OLD TOWN White Coffee which has been mushrooming rapidly in the Klang Valley. From one flagship outlet in Ipoh, OLD TOWN White Coffee now has over 137 outlets in Malaysia and Singapore today, all in a span of just over 5 years. The “OLD TOWN White Coffee” brand is present in 15 countries, including Hong Kong and Taiwan.
According to our Domestic Trade, Co-operatives and Consumerism Minister, Datuk Seri Ismail Sabri Yaakob, although the franchise industry is relatively new in the country, it has shown positive development in the past two decades. Datuk Seri Ismail Sabri further stated that about 5,000 entrepreneurs are expected to become franchisees by 2012. Currently, there are a total of 374 entrepreneurs in the franchise business.
Franchising is an effective way of expanding one’s business without borrowing capital to develop the brand and the business. The basic rule to franchising is that the brand or trademark owner (“franchisor”) will license out their trademark to a third party (“franchisee”), who then carries out a similar or identical business in a different location.
The franchisee will have the right to use the trademark in return for a licensing fee which is usually a percentage of the gross turnover of the business that the franchisee runs under the trademark.
The franchisee is usually also required to allocate funds for a marketing budget to promote and market the trademark in that region or country. The advantage the franchisee has with the franchising system is the ability to use a brand which is already established and run a relatively smooth business operation, with guidelines or manuals provided for almost every aspect of the business.
The advantage the franchisor enjoys is that this enables the brand to spread its wings to other markets to be used and promoted without much expenditure; instead, instant revenue from licensing fee and royalties are gained.
The franchisor is also able to keep a tight grip on the manner of use of the trademark, by imposing requirements on the franchisee to act in accordance with a set of rules meant to preserve the value of the intellectual property rights and to deliver the expected business results and customer experience.
The above-mentioned requirements would be incorporated into the franchising agreement between both parties. It is vital for franchisors to ensure that all the intellectual property in their business is protected, including the copyright, business know-how and trade secrets. There should be a confidential obligation placed on franchisees so that the processes, operations and trade secrets of a franchise do not end up in the public domain.
When to License?
Licensing, compared to franchising, is a much simpler business arrangement between two parties. The licensing of trademarks encompasses the licensor allowing the use of their trademark by the licensee on specific products or services for a certain period of time in a particular territory. Licenses are granted in return for a royalty fee and they can be exclusive or non-exclusive.
Unlike franchisees, licensees will not receive training or ongoing support from the licensor and are not usually restricted to many rules which are imposed on franchisees.
The decision on whether it is better to license or franchise depends on the nature of business.
The rule of thumb is that if you intend for your business partner to carry on a business which is identical to yours in almost every aspect, from A to Z, then you should consider franchising.
On the other hand, if you are merely allowing the use of your trademark, either on goods similar to the ones you produce or different goods that are related to your industry, then licensing would be more apt.
Both business models are revenue generators; in order to ascertain the appropriate royalty fee and franchise fee, you have to observe and compare the fees that others in the same industry are charging. Of course, if your brand is of higher prestige and has more goodwill, then the fee should be higher than that charged by the owner of an average trademark.
Pertinent issues that trademark owners should consider when licensing their trademarks or franchising their business are briefly explained below:
- Choosing the right licensee or franchisee
The licensor or franchisor must select a business partner that has similar goals, effective support teams and management infrastructure, financial stability and distribution channels that are commensurate with the brand.
Franchisees and licensees that have a genuine passion for what the brand and business stands for would serve as good business partners. Past track records and experiences of the potential franchisees or licensees in similar business deals will also be an insightful guide to the franchisor or licensor on the business acumen of their potential business partner.
McDonald’s, for instance, seeks the following qualities in its potential franchisees in Malaysia: high personal integrity; entrepreneurial spirit and a strong desire to succeed; proven ability to motivate and train people; ability to manage finances; willingness to personally devote full time and best efforts to the day-to-day operations of the restaurant as an on-premises owner operator; willingness to participate in a training programme which may, on a full time basis, take one year or longer to complete; and financial capability to finance the franchise. They also require their chosen franchisee to work in one of their outlets for 3-5 days to learn the operations of the business hands-on.
- Maintaining brand value
The owner has to be aware of the importance of the trademark and its associated brand value. The business arrangement must be designed to maintain the brand value and allow for goods or services bearing the brand to be consistent with regard to the quality expected by consumers of the brand.
This can be done by including a term in the franchising or licensing agreement providing the franchisor or licensor with the right to periodic inspections of the licensee’s manufacturing facilities or the franchisor’s outlets.
- Guidelines on how the trademark should be used
As the goodwill of the business lies with the trademark and consistency of the way the trademark is displayed on all signage, packaging and collateral reflect on the quality of the trademark, it is vital that clear guidelines are given to the franchisees or licensees in regard to the manner of using the trademark. They should be provided with an electronic version of the trademark and the relevant artwork, designs, logos or stylized typography so that the licensee or franchisee does not create his/her own version of the trademark. This is especially important when the mark contains a design element, logo or stylized font, and will ensure that the proper size, spacing, color and typography are used. The franchise or license agreement should clearly state that copies of the mark may be made only from the artwork provided by the franchisor or licensor. Any modifications made to the trademark by the franchisee or licensee must be approved by the franchisor or licensor in advance of any use.
The agreements should also specify that the trademark must always be used in its entirety, without any separation of different portions of the mark or any abbreviations or variations thereof.
In addition, the franchisor or licensor should always require that the appropriate notice symbol, such as ® or ™ be used alongside the trademark any time the mark is used, including directly on the product and on packaging, hang tags, advertising, user or instruction manuals, promotional materials and point-of-purchase displays.
Apart from the above, it is crucial that the franchisee’s or licensee’s compliance to the rules in the business arrangement is sustained. This can be achieved by regular monitoring by the franchisor or the licensor.
The agreement between both parties should leave no room for ambiguity and all terms should be clearly defined. It is advisable that parties deciding whether to enter into licensing or franchising agreements seek professional advice before signing any agreement as without the right terms supporting your rights as a licensor or franchisor, your potential success as a licensor or franchisor could backfire, leaving you with a worthless trademark.
Note: The trademarks identified in the article belong to their respective owners. KASS does not claim any proprietary right whatsoever; they are used merely for educational purposes.
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