Franchising your business offers you the chance to use your franchisee’s capital to grow your business much more rapidly than if you chose to take a more traditional expansion route. One disadvantage, however, is that for your franchise to be a success you must disclose the secrets of your business and grant your franchisees access to your intellectual property (IP).
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When you’re developing a successful franchise model, it’s vital that your IP is protected. You can achieve this by including restrictions in the franchise agreement to mitigate the risk of your knowledge and IP being exploited.
How is intellectual property related to franchising?
Put simply, franchisors grant franchisees intellectual property rights so they can benefit from selling goods and services under the franchisor’s brand identity. In return for this licence, the franchisee pays a franchise fee and ongoing royalty payments which are generally calculated as a percentage of their gross sales.
Your IP will be considered valuable by your franchisees because of the time and effort you will have invested in developing a robust business model and reputable brand.
Types of intellectual property
IP tends to relate to your brand. It includes your product names and designs, your inventions and anything else you create, such as written content and images. IP is protected through trademarks, copyright, patents and design rights, all of which enable franchisees to own and operate their franchise businesses effectively. But what are they, exactly?
• Trademarks – Trademarks protect signs or symbols that differentiate the goods and services of different traders. This includes logos, jingles and product names. Unlike other forms of IP, trademarks can last for centuries. Registered trademarks are the most widespread form of IP and, when protected, can be one of the most critical assets of any business.
• Copyright - Copyright protects material such as art, music, literature, films, web content and audio recordings. For a franchisor, the operations manuals and training materials will need to be covered by copyright.
• Patent – These protect the technical and functional features of products and processes. Patents relate to physical objects you’ve created, such as machines, tools and medicines. All patents must be registered in each country where protection is needed and must be renewed annually.
• Design rights - Design rights protect the appearance of products. The shape, colours, fonts and designs of logos, websites and product packaging are all included. You should renew it every five years and can continue doing so for up to 25 years.
• ‘Future IP’ – some franchise agreements also place restrictions on the franchisee so that they can’t disclose any confidential information relating to the knowledge that you share with them during the contract term. This know-how is provided in return for the franchise fee, but that doesn’t make it the property of the franchisee to do what they like with it.
How should you protect your intellectual property?
Follow these three steps to make sure that your most valuable assets are protected:
1. Identify your IP
When you’re franchising your business, it can be easy to overlook exactly what IP you have and how it should be safeguarded. But failing to identify and protect your brand and trademarks sufficiently can lead to the value of your franchise being impacted. Why would a prospective franchisee invest in a business that is unable to differentiate themselves in a competitive market? The only way to rectify this situation would be to re-brand, which can be extremely costly and may even result in existing franchisees taking legal action.
You should aim to review and document your IP on a regular basis. Work out which IP you own, and which you jointly own with another entity. As your franchise grows, you may have additional IP, or existing IP may change. For your franchise to remain protected, you should focus on the vital IP for your franchise, including know-how, trademarks and copyrights.
Remember to keep your franchise agreement template updated too. By ensuring that the contract has a full list of the IP that franchisees have the right to use, you’ll avoid confusion and maintain the value and attractiveness of your business.
2. Protect your IP
Once all of your IP has been assessed, it's essential to protect it. It’s recommended that you seek professional advice regarding your branding to make sure that your brand is registerable as a trademark. When this has been confirmed, you should waste no time in registering it.
The registration of your brand acts as an insurance policy and ensures that your business is considered worthy of the franchise fee by potential investors. Effectively, you’re mitigating the risk of your franchisee registering your trademark in their own name. Remember also to register any taglines that accompany your brand name.
Also, if it’s financially viable, take out insurance for your IP so that you are compensated, should it be infringed by a third party. To do this, you will probably need to work out the total value of the IP. Take into account how much it cost to create it, including how much those who created it were paid. You should also think about how much money it could generate in the future; for example, through royalties.
3. Control the use of your IP
If you don’t take the first two steps of assessing and protecting your IP, you run the risk of your franchisees using your assets for their own purposes.
The first thing you should do is consult a legal advisor. Of course, you’ll want to hire one if your IP is ever used by a third party, but it is also effective to get expert advice before you start up your business. That way, you can be sure that you haven’t forgotten key steps and that your IP is protected.
For any documents, images, diagrams or other media, include the copyright symbol followed by the owner name to make sure people know that the content is protected. Notices should be followed by the letters TM in a circle.
When you sign commercial contracts to establish business partnerships, make sure the document includes information regarding IP. This should ensure that it is not exploited by third parties involved in the partnership.
Intellectual theft is used to describe the process of stealing intellectual property, whether it’s a logo, photograph, website content, song, recipe or knowledge. The most significant threat comes in the form of franchisees who leave your business at the end of their franchise term but continue trading in the same industry.
If you don't ensure that they rebrand entirely, there is a chance that they may offer inferior products or services, which will have an adverse effect on your reputation – despite them not being part of your network anymore. You must be prepared to protect yourself against the ongoing infringement of IP rights. Your existing franchisees deserve to know that their investment in your business is safe.
What to do when your IP is stolen
Often, IP is stolen without the owner even finding out. But if you do discover that yours is being used illegally, here are the steps you should take:
First of all, you should approach the person or entity that has used your IP. Usually, this means sending them a letter explaining that you know they’re using your IP and that you’d like them to stop. If you’re lucky, they will either agree to stop using it or pay you to continue doing so. This is the best possible outcome, but things don’t always turn out this way. If they refuse to stop using it, you’ll need to decide whether to take legal action. This should not be a decision taken lightly.
A lawsuit is likely to be fairly expensive and could end up reflecting badly on your entire franchise, even if the outcome is positive. You’ll also need to put time aside to deal with it, taking you away from your business when you could be working on growing it. However, you may find that once you announce that you intend to take them to court, they quickly stop using your IP, resolving the problem for you. If they don’t, and you win the court case against them, they could be facing fines and imprisonment. They may even have their business operating licence taken away from them.
In summary, for your franchise to continue to be of value to both you and your franchisees, you must proactively manage and adequately protect your IP. You should monitor the market to make sure that third parties are not infringing your IP rights. This way, breaches can be identified and dealt with as soon as possible.
However, you should remember that breaches are more likely to happen closer to home, so franchise agreements should be clear on IP usage and franchisees leaving your network should be monitored to make sure that they don’t devalue your business by continuing to trade under your brand name.
Alice Tuffery, Point Franchise ©