Franchise Agreement versus Trade Mark Licence

[Claire B]

Hi everyone, hope I can pick your brains a bit.... (long one, sorry)

I have been running my business for a number of years now and would like to expand it nationwide. Ever since I started, I had it in mind to oneday expand either through franchising, or through Trademark Licencing (I am now the proud owner of a registered trademark :lol: )

The problem is, I get a bit confused sometimes about the difference between the two!

My understanding is that a franchisee would pay me an upfront fee and then an ongoing royalty payment for the right to operate the business model within their own exclusive territory, but they would OWN the business and be entitled to sell the business and claim the assets afterwards.

With a Trademark Licence, the Licencee would also have to pay a fee (this could be an annual fee, or an ongoing management fee), but that I, as the Licensor, would own the business overall. Am I correct in thinking, that if a Licencee wanted to quit, or if their Licence period expired, they would simply hand the business back to me, without any claim over the assets built up for that particular territory?

I know fast fences is also heading in this direction, but would appreciate any more advise here. I have attended a seminar with the Bristish Franchising Association, which was helpful, but heavily biased in favour of followoing the franchise route (for obvious reasons, I guess)

Has anyone here, expanded either through franchising or trademark licencing?

OK, epic post over :D

[cjd]

While you're waiting for a proper lawyers view, here's a pragmatic opinion.

A licence gives the licencee the right to use your intellectual property over a defined period in return for a fee. It's generally a hands off unless you do something against the contract approach. The licensee has the rights to do what he likes so long as he pays the royalty and abides by the contract.

A franchise is a kind of heavy handed license agreement and usually is a complete business model not just intellectual property but business practises, marketing, training and often includes the requirement to purchase materials and products from the licensor - a complete business in a box.

There are gradients between the two....

[fastfences]

My understanding is that a franchisee would pay me an upfront fee and then an ongoing royalty payment for the right to operate the business model within their own exclusive territory, but they would OWN the business and be entitled to sell the business and claim the assets afterwards.

I know fast fences is also heading in this direction . . .


Hi Claire,
I'm not legally well versed in this area (yet) but I'm sure the concern for any franchisor is that the business is sold to an 'appropriate' person. The Franchise agreement can stipulate what the sale terms are. I wonder if your having a 'first option' upon the proposed sale would help?

Is your motive the protection of the business from falling into 'wrong' hands i.e. the possibility of later discrediting your good name?

You will note a new member 'Stickybobs' in introductions has mentioned she's in the process of franchising her play centre. Check out her thread:
http://www.ukbusinessforums.co.uk/viewtopic.php?t=8477

Perhaps we'll both gang up on her and pick her brains! :wink:
Cheers, Nigel

[VeryMark]

Dear Claire,

A franchise agreement would in fact include a trade mark licence, and trade mark licences can also take various forms.

In either case, the licensee/franchisee would own some of the assets - since, basically, the deal is you lend your intellectual property (trade mark, copyright, know-how etc) and the licensee/franchisee lends capital and/or whatever else it is they have to offer/you need.

The main difference between franchising and other forms of licensing is that the franchisee replicates the exact business model you have created, i.e. you help them to set up an identical branch of your business which everyone else sees as part of your business.

However, the franchisee owns the business under your control, you own the goodwill and everything that the business relies on for its appeal to the customer whilst they own physical assets (but can't use your branding), and you earn a percentage of the profits without needing such a substantial financial investment.

Franchising demands, however, a substantial investment in ensuring the necessary control and support of the franchise network, as well as, of course, having a successful business model that franchisees want to invest in.

In other forms of trade mark licensing, the licensee operates a business which is not seen as part of your business but rather as a co-operative venture, and the licensee brings to the party business either skills or something else which you lack other than simply finance.

For example, if the greetings card firm Andrew Brownsword licenses 'Forever Friends' to a manufacturer of mugs, then the latter has knowledge and resources in a market which Andrew Brownsword cannot enter on its own.

To put it another way, franchising tends to operate horizontally (i.e. franchisees all operate the same kind of business in different parts of the same market) whereas trade mark licensees operate vertically (i.e. in different markets).

At the end of the day, whether it's a franchise or trade mark licensing program is unimportant; the questions are rather (a) what do you have to offer? (b) what do you need? (c) how do you structure a program accordingly from a practical, financial and legal viewpoint?

In either case, it's essential that the franchisee/licensee does not devalue your brand.

I have experience of both franchising and licensing globally with Land Rover and Mini and would be happy to talk to you further if you wish.

[fastfences]

cheers, Philip, excellent info!
regards, Nigel

[Claire B]

Excellent information, thanks! :D

Ideally, I would like to expand via trademark licencing BUT, I would still like to have a fair amount of say over how the licencees ran their businesses. For example, I would want them to wear a specified uniform, and to use approved stationary and advertising templates (to keep the brand image strong). I would also be providing them with all the materials and equipment that they would need to use. In addition to that, they would need to keep records of everything they do (customer records, income, advertising spend etc etc) and report all this information back to me.

This is an opportunity that will appeal mainly to mums with school aged children, who will have the opportunity to be self employed and run their own profitable business within school hours and within the school term. I think that many mums would be put off by having to pay an upfront franchise fee, so was hoping that the opportunity for them to operate 'under licence', would be a more attractive proposition.

Why am I reluctant to operate as a franchise? My impression is (having attended the BFA Franchisor Seminar last year), that it will require a great deal of investment from me up front, that my franchisees will have much higher expectations of me with regards to the level of support, ongoing training and national marketing that I would be obliged to offer under the franchise agreement and that I would also have to get involved in the resale of their business, when their franchise period expires (or they decide to quit)

maybe I am being a coward, :oops: but I just feel that I could expand more quickly and at less cost to myself and to my licencees, if we went down the licencing route?

There you go, I have blabbered on again! :roll: I really do appreciate all your input guys. I mght also get intouch with the ladies that run StickyBobs, as they are going down the franchise route too (thanks for the link Nigel)