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Franchising and Licensing are the important half-way houses for any business form that possesses technological and marketing expertise. Such a firm may license or assign its rights under its owned patents and the right to use its unpatented technology to other licensees. In the same or in the other situations, the firm may have prestigious trademark and special marketing techniques and experiences which are sometimes referred to as ³franchises´. Many new or prospective business owners mistakenly believe that the words franchisee and licensee are synonymous. They¶re not! In fact, a misunderstanding of the differences between a franchisee and a licensee can be a recipe for a small business disaster. Knowing the difference is an important first step toward success in your new business venture.

Franchising is a term which can be applied to just about any area of economic endeavour. Franchising encompasses products and services from the manufacture, supply for manufacture, processing, distribution and sale of goods, to the rendering of services, the marketing of those services, their distribution and sale.

Definition of Franchising:
The International Franchise Association (IFA) defines franchising as a ³continuing relationship in which the franchisor provides licensed privilege to do business, plus assistance in organizing, training, merchandising and management in return for a consideration from the franchisee´. Franchising may be also defined as a business arrangement which allows for the reputation, (goodwill) innovation, technical know-how and expertise of the innovator (franchisor) to be combined with the energy, industry and investment of another party (franchisee) to conduct the business of providing and selling of goods and services. The fact that, as a method of doing business, franchise arrangements have grown so rapidly in the last 10 or 20 years (world wide) is due simply to the fact that franchises are an effective way of combining the strengths, skills and needs of both the franchisor and the franchisee. To be truly successful, the one is reliant on the other. In most instances, franchising combines the know-how of the franchisor with the where-with all of the franchisee and, in the more successful franchising systems, the energy of both.


Franchising is a system of business that has grown steadily in the last 50 years and is estimated to account for more than one-third of the world¶s retail sales. There are few of us how who are not touched by the results of franchising. Franchises range from the ubiquitous McDonalds® to lawn mowing services such as Mr Green®, valet services, medical and dental services, to book keeping services and even to services helping us to prepare our tax forms. Franchising is not restricted just to fast food outlets and gardening contractors. There are now franchises for mentoring managers and sportspeople and franchises for internet shopping. Who knows what the future will bring? The only thing that we can be sure of, is that if there is a need in the market place, it is more than likely going to be filled by an innovative and creative business which is seeking to capitalise on its market lead and Intellectual Property advantage through some form of franchising scheme.

Types of Franchises:
There are basically two (2) types of franchises. 1. Product Distribution Franchises 2. Business Format Franchises Product Distribution Franchises Under this type of franchise arrangement the franchisee simply sells the franchisor¶s products; there is basically a supplier ± dealer/retailer relationship. The franchisor has permitted the franchisee to use, under license, his logo and trademarks. There is no management support or system for running the business. Business Format Franchises On the other hand, the Business Format franchisee not only uses the franchisor¶s product, logo and trademarks, but is also provided with a complete system of conducting the business itself. This system will include total management guidance, such as marketing plans and full operational manuals. This is the most common type of franchise in the USA, Canada and the UK. Business format franchising is what franchising is all about today and is essentially why franchising is the most successful method of distributing goods and services in the economic history of the planet Earth. McDonald¶s best epitomizes the incredible power of franchising. Over time McDonald¶s learned how to absolutely maximize the sales potential of a fast food outlet. Their concept is one with a very high degree of systemization. McDonald¶s has an idiot proof system for every aspect of


their business from exactly how many seconds the french fries are cooked to the exact words the employees use when addressing the customers. McDonald¶s leaves nothing to chance or employee discretion, there is a McDonald¶s way for everything and everything is done the McDonald¶s way. The core of their business is the strict adherence to QSC, or Quality, Service and Cleanliness. Over time McDonald¶s developed a superb training program, which absolutely insured that every franchisee would implement their systems 100% of the time. Further they developed a unique relationship with the franchisees, which is based on the fact that McDonald¶s owns the land and building for all the franchise units. They in essence rent the business to the franchisee for a percentage of the gross sales of the unit. The beauty of this concept is that the interest of the franchisee and McDonald¶s are absolutely intertwined, the better the franchisee does, the better McDonald¶s does. McDonald¶s doesn¶t sell anything directly to the franchisees. All of McDonald¶s products are sold to the franchise by specified vendors. This way there is never a conflict of interest whatever is good for one is good for the other. Further, McDonald¶s has a very strong franchise agreement that is biased in favor of McDonald¶s, which is as it must be. If a franchisee doesn¶t adhere to McDonald¶s high standards, McDonald¶s has the contractual power to force the franchisee out of the system. McDonald¶s has never hesitated to do this if a franchisee has failed to bring it¶s unit up to the high standards of QSC required after being duly warned to do so. McDonald¶s is incredibly successful because it has implemented the business format franchise model to near perfection. This is franchising in essence, the perfection of a business concept and the transfer of the knowledge acquired through the process of reaching that perfection and a follow up mechanism that insures that the systems and procedures are properly executed over time.

Franchise Arrangement
The franchise arrangement is an arrangement whereby the franchisor permits ± licenses the franchisee, in exchange for a fee, to exploit the system developed by the franchisor. The franchised system is generally a package including the intellectual property rights ± such as the rights to use the Trade Mark, trade names, logos, and ³get-up´ associated with the business; any inventions such as patents or designs, trade-secrets, and know-how of the business and any relevant brochures, advertising or copyrighted works relating to the manufacture, sale of goods or the provision of services to customers. The Intellectual Property is unique to the business and provides the business with it¶s competitive advantage and market niche.


Typical Franchise System
A typical franchise system will generally include: 1. A license to use the system In return for an agreed amount the franchisee is granted a license to conduct his or her business along the lines prescribed by the franchisor. This will usually include the use of all relevant Intellectual Property, marketing and advertising publications, store design and ³get-up´, as well specialised equipment necessary to operate the systems and on-going or development and improvements to the system. 2. A shared development and improvement obligation Most franchising arrangements have an on-going shared development and improvement obligation which is encumbent on both the franchisor and franchisee. This requires a mutual trust and respect and a sharing of the overall aims and goals of the franchise. The basic tenant for this approach is that what is good for one must be good for the other. The franchisor is also obligated in the arrangement to nurture, encourage and provide assistance to the franchisee. The franchisee for their part is required to maintain and promote the franchise and to conduct business prescribed in the system manuals and best practice guidelines. The franchisee also has the continuing obligation to pay maintenance fees to the franchisor in accordance with the franchise arrangement. These fees usually include an advertising / marketing component as well as an on-going management service fee. 3. The franchisor¶s right to determine how the business operates Most Franchise arrangements contain a component which stipulates that the franchisee is to conduct the business along prescribed guidelines and in accordance with the franchise best operating practice. The franchisor for his part is required to maintain, distribute and update the manuals, operating procedures and quality requirements when changes are made ± and to provide on-going training. The franchise arrangement will usually also require the franchisee to protect the Intellectual Property of the franchise system, and to operate in accordance with territorial or geographical obligations agreed. Both parties will be required to conform to the agreed accounting disclosure provisions. The franchising arrangement is a legal document relying on contract law and inevitably on mutual trust between both parties


The rapidly growing franchise industry in India, although at a very nascent stage, is said to be the second largest in the world. With the current growth pegged at nearly 30-40%, the industry is poised for an even more rapid growth in the forthcoming years. With an annual turnover of nearly US$3.3 billion, it consists of nearly 800 franchisors (only 10% being foreign owned) and about 40,000 franchisees. Franchising as a concept has been steadily gaining popularity because of the huge untapped potential in the Indian context, emergence of tier I and II cities as the next big retail destination, the relatively lower level of capital required to start the business, lower risk and availability of established brand names, marketing network and sales channels. India is the most sought after nation by international retailers due to low presence of international brands as compared to the country¶s market size. Recent developments such as relaxation of foreign investment rules, liberalized WTO guidelines and greater incentives from the government have clearly led to a spurt in the number of franchised outlets in India. Single-brand retailers are now allowed to own up to 51% of their operations in India. Another major factor favoring the franchising market is that the Foreign Direct Investment (FDI) policy for organized retail does not permit the direct entry of foreign retailers. The latter, therefore, have to resort to franchised business models to enter the Indian market. Bata, the footwear company, was among the first franchisors in India, followed by other multinationals such as Coca-Cola. Pioneers among the Indian companies are NIIT, Apollo Hospitals and Titan Watches.

LEGISLATION As per government norms, foreign franchisors can charge royalties up to 1% for domestic sales and 2% on export sales for use of their brand name or trade mark, without transfer of technology. RBI approval is required in case the royalties exceed the prescribed limits. If the proposed franchise arrangement involves technology collaboration, the Government permits a lump sum payment to the extent of US$2 million to the foreign franchisor. Besides, royalties up to a maximum of 5% on domestic sales and 8% on export sales are permitted without approval. The Government has specified a formula for calculating royalties that must be followed for transferring funds to the foreign franchisor.


GROWTH DRIVERS The franchise market in India, although just over a decade old, has enormous potential, thanks to the changing Indian business environment. The sheer size and diversity of the population, growing economy and the consequent rise in disposable income and change in lifestyles and the advent of modern retailing provide excellent franchise opportunities in the country. Sectors such as retail, telecom, education and healthcare, are the fastest growing. Other sectors such as automotive, IT, beauty and tourism are fast catching up. Besides, the fact that about 15% of sales in India are through franchised outlets, as against 60% in the US, is indicative of the massive industry potential. KEY SECTORS Retail With over 300 malls and 1500 supermarkets, the retail sector in India, is poised for the largest leap. Factors such as growing urbanization, rising disposable income and changing lifestyle pattern among the urban population have contributed to the estimated 8% annual growth of this sector. Retail sales in India through franchisees constitutes about 2% of total retail sales, as against nearly 50% in the US, indicating huge potential for the market. Retailers are now tapping tier I and II cities as the new hub for malls and other retail outlets. Telecom With the consistently growing subscriber base, franchising has emerged as a sure winner in the Indian telecom market. In order to match up to the growing demand, the major players are opting for franchisees to reach out to the consumers. The companies have tied up with entrepreneurs for single-branded as well as for multi-branded outlets. Aortal, Vodafone, Relaince and Tata Indicom have set up retail service centers across the country. Handset manufacturers such as Nokia, Motorola, Samsung and LG have also started exclusive outlets based on the franchise model. Manufacturers and service providers are resorting to franchised business models to aggressively market their products and services in the highly competitive telecom business. With teledensity in India clearly below the world average, the sector offers a huge business potential to franchisees. Education The education sector is not likely to be severely impacted by the current slowdown. Franchisees have gained from the sudden spurt in the number of play schools, spoken English centers, computers and overseas education consulting. Coupled with this is the fact that parents in India


are willing to pay a premium for quality education. As a result, major players such as Educomp, Kangaroo Kids and Kidzee, plan to expand their franchise network. These factors have attracted international players such as ABC Montessori and KipMcGrath Worldwide Education Centers to India. Both the companies have a target of setting up 400franchise based schools each in the next five years. In turn, the Indian market has gained from the introduction of new and innovative concepts in this sector. Travel A sudden spurt in foreign exchange revenue from the travel industry has forced domestic as well as international players to opt for franchising. Major players such as Thomas Cook, Kuoni Holidays, Cox & Kings and Mercury Travels, are on the lookout for franchisees for expand their market presence. These companies are also looking at smaller cities apart from metros, to set up their centers. Kuoni has set a target of 15-20 franchisees by the end of 2008. Cox & Kings plans to set up 700 franchise outlets by 2010, while Ezeego1.com plans to have 300 franchise outlets by 2010, for visa and foreign exchange services. KEY CONCERNS Key issues impacting the market are the absence of a specific legislation regulating the franchise agreement. Prominent among these are cases when the quality of service provided by the franchisee falls below the prescribed standard or when the franchisor defaults in providing the promised support. Being a relatively new concept in India, there is lack of information and sharing of best practices among the players. Besides, several laws such as Intellectual property, taxation, labor, property and exchange control regulations govern the franchise agreement, which confuses the foreign franchisor. Another major concern is that a large number of financial institutions do not consider soft expenses as part of project cost. The vast geographical expanse of the country, while on one hand, offers certain advantages, could also pose a challenge to the franchisee. In such cases, the business can opt for a single master franchisee for the entire country or a master franchisee for each of the four regions, depending on the type of business. THE FUTURE Notwithstanding the current economic slowdown and certain regulatory issues, the industry continues to remain bullish about the future. While the slowdown is more likely to impact the retail market, spending in non-discretionary sectors such as healthcare will largely remain unaffected. The franchising market, therefore, has enough reasons to remain upbeat about its future in India.


The degree to which a franchise system penetrates a target market over time often is influenced by the rate to which its individual franchisees expand. Yet a franchisee's decision to expand the business operation depends, in part, on the perception of value that the franchisee expects to receive from the franchisor in return for a variety of fees (for example, entry fee, advertising fees, royalties). Moreover, the franchisee's experience with its franchisor may strengthen or weaken his or her perception of franchisor value. The change in perception of franchisor value can influence franchisees' decisions to expand their franchise operations. To date, scant research exists on factors influencing a franchisee's decision to expand. In the reported study, a four-stage analysis was conducted to examine empirically whether franchisees' opinions about the value of their franchisors changes over time. The study findings reveal that franchisees had the strongest, positive opinions when asked to recall an earlier decision to expand their franchise operations. These opinions weakened when franchisees contemplating expansion of their operations were asked for their current and anticipated future opinions of franchisor value. Overall, franchisees were undecided when asked about their perceptions of current franchisor value and anticipated future franchisor value. Implications of these findings for theory and practice of franchising are discussed. Introduction Franchising commonly is considered a contractual vertical marketing relationship between a franchisor and one or more franchisees. Franchisees of various types exist, often distinguished by the size of their operation and the modalities of the contractual agreement with the franchisor (Kaufmann and Kim 1995; Kaufmann and Dant 1996). They typically pay an entry fee as well as recurring royalties and advertising fees to the franchisor. In return, franchise owners receive the right to use the trademark or even the entire business format as well as a host of services provided by the franchisor, often including legal advice, consulting on location and real estate development, national advertising campaigns, training, and so forth. The franchisor-franchisee relationship represents a partnership conducted as a form of relational exchange. As such, the strengthening of the franchisor-franchisee relationship, such as through expansion of individual franchisees' businesses, involves a sharing of benefits and costs (see Macneil 1980 for a description of relational exchanges). Accordingly, of particular interest to franchise owners is the balance between the payments made to the franchisor (that is, franchisee costs) and the "value" (that is, franchisee benefits) received in return (Porter and Renforth 1978; Kaufmann and Lafontaine 1994; Michael 1999). Moreover, consistent with partnership theories (for example, Garbarino and Johnson 1999), franchisees are expected to remain in the relationship as long as they perceive to receive adequate value for their contributions to the franchisor. Recognizing that franchisees' perceptions of value of services received versus payments made to the franchisor may change over time, it is important that franchisors


effectively manage franchisee perceptions of the value received from the franchisor. Unfortunately, research on franchisees' perceptions of their franchisors is scant. As a first step to filling this gap in the understanding of franchisee-franchisor relationships, we empirically examine whether franchisee perceptions of franchisor value change over time. In essence, we are aiming to answer the question, "Does the strength of perceptions of value assessment change over time?" More specifically, we examine single-unit and sequential multiunit franchisees' perceptions of value received from the franchisor at the present time and compare these assessments to expectations for the future and to expectations they recall from their past. The knowledge that, in fact, franchisee perceptions of franchisor value change over time may have many implications for the evolution of the franchisor-franchisee relationship. Recognizing that changes in attitudes (that is, value perceptions) tend to occur before changes in behavior (Ajzen and Fishbein 1980), franchisors would be able to manage their franchisor-franchisee relationships more effectively by monitoring how their franchisees perceive them. For example, by understanding the nature and direction of changes in franchisees' perceptions of franchisor value, franchisors may be able to position themselves better to their franchisee partners to achieve a positive value perception and thereby to gain greater cooperation from the franchisees. First, a review of relevant franchising literature is provided. Then, the research design, analysis, and findings are presented. Finally, implications, recommendations, and limitations of the study are outlined.


Advantages of Owning a Franchise
The main advantage of owning a franchise is the feeling of freedom that being self-employed brings. This freedom is tempered with the knowledge that the owner has invested in a proven system and has the training, support and encouragement of other franchisees and the franchisor. Owning a franchise should also provide a semi-monopoly environment in which to conduct business in a particular area. Generally, there is also an informed ready-made customer base. There will of course be competitors but the franchisee will be granted the sole franchise for a given area and often will be given client listings or job sheets. Most importantly though, being part of a franchise ensures the franchisee is part of an instantly recognizable brand, the product or service expectations that a brand brings, and the reputation gained by the brand over time. A franchise also offers the franchisee with the ability to capitalize on the know-how and systems that have been proven to be successful. The quality of the product or service provided is therefore in many ways guaranteed. Some of the advantages a franchise offers are:
y y y y y y y y y y

Freedom of employment Proven product or service outcomes Semi-monopoly; defined territory or geographical boundaries Proven brand, trade mark, recognition Shared marketing, advertising, business launch campaign costs Industry know-how Reduced risk of failure Access to proprietary products or services Bulk buying advantages On-going research and development


When the McDonald brothers, Dick and Mac opened their first restaurant in 1940 in San Bernardino, California, they could never have imagined the phenomenal growth that their company would enjoy. From extremely modest beginnings, they hit on a winning formula selling a high quality product cheaply and quickly. However, it was not until Ray Kroc, a Chicago based salesman with a flair for marketing, became involved that the business really started to grow. He realised that the same successful McDonald's formula could be exploited throughout the United States and beyond. There are now more than 29,000 McDonald's Restaurants in over 120 countries. In 2001, they served over 16 billion customers, equivalent to a lunch and dinner for every man, woman and child in the world! McDonald's global sales were over $38bn, making it by far the largest food service company in the world. In 1955, Ray Kroc realised that the key to success was rapid expansion. The best way to achieve this was through offering franchises. Today, over 70 percent of McDonald's restaurants are run on this basis. In the UK, the first franchised restaurant opened in 1986 - there are now over 1,200 restaurants, employing more than 70,000 people, of which 34 percent are operated by franchisees. This case study examines the success of franchising and investigates the special three way relationship that exists between the franchisee, the franchisor and the suppliers.

What is franchising
McDonald's is an example of brand franchising. McDonald's, the franchisor, grants the right to sell McDonald's branded goods to someone wishing to set up their own business, the franchisee. The licence agreement allows McDonald's to insist on manufacturing or operating methods and the quality of the product. This is an arrangement that can suit both parties very well. Under a McDonald's franchise, McDonald's owns or leases the site and the restaurant building. The franchisee buys the fittings, the equipment and the right to operate the franchise for twenty years. To ensure uniformity throughout the world, all franchisees must use standardised McDonald's branding, menus, design layouts and administration systems


Advantages to the franchisee
1. Being their own boss In return, the franchisee agrees to operate the restaurant in accordance with McDonald's standards of quality, service, cleanliness and value. McDonald's regularly checks the quality of the franchises output and failure to maintain standards could threaten the licence. The franchisee is also expected to become involved in local events and charities. Ray Kroc believed strongly that a business must be prepared to put something back into the community in which it operates. The franchisee, for all the training and support McDonald's offers, is running his or her own business. They fund the franchise themselves and therefore have much to lose as well as gain. This makes them highly motivated and determined to succeed.

2. Selling a well established, high quality product In this case, the product is recognised all over the world. A large proportion of new businesses and new products fail, often due to costs of the research and development needed. The McDonald's formula, however, has been successfully tried and tested. Ray Kroc's insistence that all McDonald's outlets sold the same products and achieved the same quality has led to a standardisation of the process and great attention to detail. The cooking processes in McDonald's restaurants are broken down into small, repetitive tasks, enabling the staff to become highly efficient and adept in all tasks. This division of labour and the high volume turnover of a limited menu allows for considerable economies of scale. For the franchisee, this can considerably reduce the risk of setting up their own business. There is no need to develop the product or do expensive market research. Nor will they have sleepless nights wondering if the product will appeal to the consumer. McDonald's carries out regular market research. 3. Intensive initial training


Every franchisee has to complete a full-time training programme, lasting about nine months, which they have to fund themselves. This training is absolutely essential. It begins with working in a restaurant, wearing the staff uniform and learning everything from cooking and preparing food to serving customers and cleaning. Further training at regional training centres focuses on areas such as business management, leadership skills, team building and handling customer enquiries. The franchisee will have to recruit, train and motivate their own workforce, so they must learn all the skills of human resource management. During the final period, the trainee learns about stock control and ordering, profit and loss accounts and the legal side of hiring and employing staff. Consequently, no McDonald's franchisee would have to ask a member of his or her staff to do something that they couldn't do themselves. Knowing this, can also be a powerful motivator for the staff. 4. Continuous support McDonald's commitment to its franchisees does not end with the training. It recognises that the success and profitability of McDonald's is inextricably linked to the success of the franchises. A highly qualified team of professional consultants offer continuous support on everything from human resources to accounting and computers. The field consultant can become a valued business partner and a sounding board for ideas. 5. Benefit from national marketing carried out by McDonald's A brand is a name, term, sign, symbol or design, (or a combination of these) which identifies one organisation's products from those of its competitors. The phenomenal growth of McDonald's is largely attributed to the creation of its strong brand identity. McDonald's trademark, the Golden Arches, and its brand name has become amongst the most instantly recognised symbol in the world. In the UK, McDonald's recognised the need for a co-ordinated marketing policy. In order to be successful, an organisation must find out what the customers want, develop products to satisfy them, charge them the right price and make the existence of the products known through promotion. Cinema and television advertising have played a major part in McDonald's marketing mix. McDonald's is now the biggest single brand advertiser on British television. Radio and press advertisements are used to get specific messages across emphasising the quality of product ingredients. Promotional activities, especially within the restaurant, have a tactical role to play in getting people to return to the restaurants regularly. All franchisees benefit from any national marketing and contribute to its cost, currently a fee of 4.5 percent of sales. The franchisees additionally benefit from the extensive national market research programmes that assess consumer attitudes and perceptions. What products do they want to buy and at what price? How are they performing compared to their competitors?


Any new products are given rigorous market testing so that the franchisee will have a reasonable idea of its potential before it is added to the menu. The introduction of new products, which have already been researched and tested, considerably reduces the risk for the franchisee. Massive investment in sponsorship is also a central part of the image building process. Sponsorship in 2002 included:
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Football World Cup Olympic Games Community Partner of The Football Association The Scottish Football Association The Northern Ireland Football Association The Football Association of Wales PopStars: The Rivals

all of which increases awareness of McDonald's brand. However, McDonald's still follows Ray Kroc's community beliefs today, supporting the Tidy Britain Group and the Groundwork Trust, as well as local community activities. 6. Forecasting Another major problem for a new business is predicting how much business it might enjoy, running the risk of either cashflow problems or the difficulties associated with overtrading. The turnover and profit from any outlet will vary, depending on a wide range of internal and external variables. Each franchisee is expected to take a positive approach to building up sales, although an average rate of return of over 20 percent is generally expected over the lifetime of the franchise.

The advantages for the franchisor
McDonald's recognises the benefits of a franchised operation. Franchises bring entrepreneurs, full of determination and ideas, into the organisation. Franchising enables McDonald's to enjoy considerably faster growth and the creation of a truly global brand identity. The more restaurants there are, the more McDonald's can benefit from economies of scale. On the financial side, McDonald's receives a monthly rent, which is calculated on a sliding scale based on the restaurant's sales, i.e. the higher the sales, the higher the percentage and visa versa. There is also a service fee of 5 percent of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cashflow and is generally about £150,000 upwards.


The new franchisee is expected to fund a minimum of 25 percent of this from their own unencumbered funds.

Dynamic innovation
Whilst the franchisees have to agree to operate their restaurants in the McDonald's way, there still remains some scope for innovation. Many ideas for new items on the menu come from the franchisees responding to customer demand. Developing new products is crucial to any business, even one which has successfully relied on a limited menu for many years. Consumer tastes change over time and a company needs to respond to these changes. Innovation injects dynamism and allows the firm to exploit markets previously overlooked or ignored. The introduction of the Egg McMuffin in 1971, for example, enabled McDonald's to cater initially for the breakfast trade. Filet-o-Fish, Drive-thru's and Playlands were all products or concepts developed by franchisees.

The three-legged stool - the suppliers
A third group of stakeholders, critical to the success of the franchise operation, is the suppliers. As McDonald's considers the quality of its products to be of absolute importance, it sets standards for suppliers that are amongst the highest in the food industry. McDonald's believes in developing close relationships with suppliers - everything is done on an open accounting, handshake trust basis. The supplier's work closely with McDonald's to develop and improve products and production techniques. This close interdependency is described as a three-legged stool principle, and involves McDonald's, the franchisees and the suppliers. Suppliers that are able to meet the quality standards set down by McDonald's have been able to share in the growth and success of McDonald's.

McDonald's views the relationship between franchisor, franchisee and supplier to be of paramount importance to the success of the business. Ray Kroc recognised the need very early on for franchisees that would dedicate themselves to their restaurants. He wanted people who had to give up another job to take on the franchise venture, relying on their franchise as their sole source of income and would therefore be highly motivated and dedicated. Consequently, McDonald's will not offer franchises to partnerships, consortia or absentee investors. The initial capital has to come from the franchisee as a guarantee of their commitment. The selection process is rigorous to ensure that McDonald's only recruits the right people.


According to Pat Upton, author of Make Millions in the Licensing Business, licensing is "the practice of allowing a manufacturer (also called the licensee) to affix or associate the idea, character, design, or other representation owned by another (licensor) to his products." In the most basic terms, licensing is the legal act of granting rights to a certain property in exchange for payment. Although licensing is often referred to as an industry, many experts claim that it is actually a marketing tool or concept. Examples of licensing arrangements can be found in a wide variety of products and services. For instance, a you might wear a sweatshirt bearing an NFL logo, purchase a child's sleeping bag with a cartoon character on it, or relax on bed sheets or other home furnishings by Ralph Lauren. "As more companies²from Fortune 500 ones to startup companies²incorporate licensed products into their lines, licensing has become the marketing strategy of the future," Vanessa L. Facenda wrote in Supermarket Business. Some of the benefits a company might gain from licensing include increasing its revenues with a minimum of expenditure, exploiting its technology, and opening new markets for its products and services. Licensing applies to small businesses in two main ways. First, small businesses may participate in arrangements known as licensing-in. In this case, the small business becomes the licensee and acquires the rights to a product or brand name from another company. This type of arrangement can help a small business reduce internal product development costs, get a faster start in an industry, and increase its stature based on its association with the licensor. The second way small businesses may participate in licensing arrangements is known as licensing-out. In this case, the small business is the licensor and reaches agreement with another company allowing that company to produce and market one of its products, apply its brand name, or use its patented technology. This sort of arrangement can help a small business underwrite its research and development costs, increase its visibility as well as that of its products, spread its marketing costs across more items, and add volume to its manufacturing operations. Retail sales of licensed products in the United States and Canada reached $110 billion in 1998. The largest segments in the licensing business were entertainment (including character licensing), corporate brand licensing, fashion, and sports licensing. While licensing arrangements continue to increase in value each year, the field is becoming more competitive. "The industry has learned from the lessons of the past," Ralph Irizarry and Cory Bronson noted in Sporting Goods Business. "More and more, we're seeing a contraction in the number of licensees, thus, eliminating fringe manufacturers and product categories. We're also seeing licensors develop partnerships with their licensees, strategic relationships, whereby the licensee essentially becomes a marketing partner." Analysts cite several reasons for the changes and consolidations taking place in licensing. Retailers have limited shelf space, and thus are unwilling to take on untested products or characters. In the mean-time, consumers are becoming more fickle and trend-conscious, which makes it more difficult to predict hot new entertainment trends. This has put a premium on


licensing rights to "classic" characters like Winnie-the-Pooh, which offer lasting value and provide consistent business. In the late 1990s, other trends in licensing included: licensed goods based on established brands and trademarks, like Jeep heavy-duty baby strollers; retail stores dedicated exclusively to a corporate brand; cross-promotions featuring two licensed properties, like movie tie-ins with fast-food restaurant meals; authorized Web sites; and sports licensing, especially of video and computer games.

Licensing Agreements
The arrangements between the licensor and the licensee are typically laid out in a legal document known as a licensing agreement. This formal agreement is an important component in a successful business venture. "While it is impossible to determine the future success of a product, much can be done in the earliest stages to ensure that a licensed product gets the best chance possible," Salas wrote. "One might even say that the entire future of a licensed product is laid out, at least in part, during the process of negotiating a licensing contract." Licensing agreements usually include a number of provisions designed to protect the interests of both parties. Some of the most common elements of licensing agreements are outlined below: Financial Provisions: Payments from the licensee to the licensor usually take the form of guaranteed minimum payments and royalties on sales. Royalties typically range from 6 to 10 percent, depending on the specific property involved and the licensee's level of experience and sophistication. Not all licensors require guarantees, although some experts recommend that licensors get as much compensation up front as possible. In some cases, licensors use guarantees as the basis for renewing a licensing agreement. If the licensee meets the minimum sales figures, the contract is renewed; otherwise, the licensor has the option of discontinuing the relationship. Time Frame: Many licensors insist upon a strict market release date for products licensed to outside manufacturers. After all, it is not in the licensor's best interest to grant a license to a company that never markets the product. The licensing agreement will also include provisions about the length of the contract, renewal options, and termination conditions. Quality Control: In order to ensure quality, the licensor may insert conditions in the contract requiring the licensee to provide prototypes of the product, mockups of the packaging, and even occasional samples throughout the term of the contract. Another common quality-related provision in licensing agreements involves the method for disposal of unsold merchandise. If items remaining in inventory are sold as cheap knockoffs, it can hurt the reputation of the licensor in the marketplace.


Licensing of Patents
In addition to products and brand names, another popular type of licensing relates to patented technology. Licensing of patents involves granting another entity the right to use an original process or type of equipment. It is important to note that licensing of patents does not necessarily require a company to give up the underlying know-how that led to creating the invention. The licensing arrangement may stipulate that the licensee only gains the right to use the invention, rather than the technical knowledge that contributed to its development. The main benefit to companies in licensing patented technology to other companies is that the fees generated may help offset the costs of developing the technology. In some cases, companies end up licensing patented technology to other entities that have already commercialized the technology. For example, the engineer who invented time-delayed windshield wipers for automobiles successfully sued the major American car makers for royalties on his patented technology years after the manufacturers had incorporated it into nearly every car on the road. More typically, however, companies will develop manufacturing processes or other technologies that are peripheral to their core business, patent the non-core technologies, and then seek to license them in order to gain a source of revenue to help offset their development costs. In an article for CMA, Alistar G. Simpson and Martin Langloi recommended that companies look for licensing opportunities for patents that extend beyond the core of their business. Companies may have some such patents as a result of an acquisition or left over after a divestiture. The next step is to identify potential licensees, which are likely to be companies already involved in that area of business. Before contacting potential licensees, Simpson and Langloi suggest that companies study the market to see how important the patented technology is and to gauge the level of profit margins generally available. These factors will influence the life expectancy of the patented technology as well as the royalties that might be expected from licensing it. Licensing patented technology²particularly when it involves patent infringement litigation² can be costly and time consuming. In addition, potential licensors may find that they lack sufficient knowledge of their target companies and industries to conduct good negotiations. But there are also several advantages to licensing non-core technologies. For example, companies may gain an opportunity to enter new areas of business, and they may develop strong relationships with licensees that open up further business opportunities. Finally, licensing noncore technologies is not likely to have a negative effect on the company's normal, core business.


Licensing and the Internet
An emerging challenge for companies involved in licensing in the twenty-first century is how licensing agreements will handle the question of online rights. The fast growth of electronic commerce on the World Wide Web has exposed a completely new area of licensing with no established rules to guide agreements. "How can you enforce geographic restrictions on a technology that is global and borderless?" Lisa Vincenti pointed out in an article for HFN. "How can you maintain exclusivity of your crown jewels if any Tom, Dick, and Harry can get your goods and put them up for sale on the Web? How can you control pricing if some Web peddlers are auctioning off your prize possessions?" Many companies with long-standing licensing arrangements are approaching Internet licensing with caution. In some cases, large-scale, highly publicized licensing agreements simply do not include online rights. For example, the domestic expert Martha Stewart reached an agreement to develop exclusive lines of furniture, clothing, and other goods for the discount retailer K-Mart. But none of these popular items appear on the K-Mart Web site because the licensing agreement between the parties did not include online rights. In the future, Vincenti predicted that licensors will make separate licensing deals with traditional and online vendors.


A quality product is one that meets the requirements of its user. For example, a motorcyclist would want to purchase a helmet that had met tough road safety tests.

BSI is an independent, non-governmental organisation that offers product testing and certification services as part of its business. BSI works with many different types of organisations, including commercial and private companies, government bodies and trade associations. It helps these organisations produce safe and quality products that meet the safety and quality requirements of the countries in which they are to be sold. Countries around the world have different requirements that products and services have to meet in order for them to be legally sold or delivered. This means that BSI offers access to these markets for their customers. For example, in the motor vehicle industry, certificates are required by European bodies for a variety of components for new road vehicles. BSI helps UK motor manufacturers by testing and certifying that their products meet the required standards. Some of the products that BSI tests for the UK motor industry include vehicle lighting, vehicle glass, motor cycle helmets and electronic equipment. BSI Kitemark® BSI Case Study page 4 Downloaded from The Times 100 Edition 12 BSI is also the owner and operator of the well-known Kitemark®. This is an independent and highly recognised symbol of trust and safety in the UK and some countries around the world. BSI runs a number of Kitemark® schemes for various products and services as wide-ranging as lighting, fire extinguishers, 13 Amp plugs and motor cycle helmets. The Kitemark® schemes are voluntary, so it is the manufacturer or service provider's choice to go through the assessment process to gain the Kitemark®. This clearly demonstrates that the manufacturer or service provider is committed to delivering a safe and quality product that meets the standards set. The Kitemark® is the symbol that gives consumers the assurance that the product conforms to the appropriate British, European or International Standard.


A Kitemark® means BSI has independently tested the product and that it conforms to or exceeds the criteria of the relevant British Standard. BSI issues a BSI Kitemark® license to the company to use the Kitemark®. The manufacturer pays for this service. This is only the start of the Kitemark® process. The product is tested and the manufacturing process is assessed at regular intervals following the issue of the license. The Kitemark® is the symbol that gives consumers the assurance that the product conforms to the appropriate British, European or International Standard. It should therefore be safe and reliable. Manufacturers do not by law have to display a Kitemark® on their products, but many do because it encourages consumers to buy and demonstrates the company's commitment to producing safe quality products.

Licensing In India
(LII) is the first licensing trade event for India. India has become a very hot market for brands, characters, entertainment, fashion, sports and art. Why? Here are some facts that make India the place to be in May: ‡ 1.1 billion population, of which 25% are middle class ‡ 31% of the population is under 14 (337 million) ‡ 130 million television viewers ‡ Kids TV viewership has doubled the past three years ‡ 37% of Indians eat fast food at least once a week, compared to 35% in the US ‡ Retail is India¶s largest industry ‡ Unprecedented growth of large malls and hypermarkets ‡ Unprecedented economic and personal income growth ‡ Indians¶ desire for US and Western entertainment and fashion brands ‡ Indian government¶s support of trademark protection ‡ English is the official government and business language






A company that owns rights in a patent, know-how, or other IP assets, but cannot or does not want to be involved in the manufacturing of products, could benefit from the licensing out of such IP assets by relying on the better manufacturing capacity, wider distribution outlets, greater local knowledge and management expertise of another company (the licensee). In addition: y Licensors with experience in the field of research and product development may find it more efficient to license out new products rather than take up production themselves. y Licensing out may be used to gain access to new markets that are otherwise inaccessible. By granting the licensee the right to market and distribute the product, the licensor can penetrate markets it could not otherwise hope to serve. y A licence agreement can also provide a means for the licensor to gain rights in improvements, know-how and related products that will be developed by the licensee during the term of the contract. However, this cannot always be demanded as a matter of right by the licensor and in some countries there are strong restrictions to the inclusion of clauses of this type in licensing agreements. y An infringer or competitor can be turned into an ally or partner by settling an IP dispute out of court and agreeing to enter into a licence agreement. y A licence may be essential if a product sells best only when it is incorporated in, or sold for use with, another product, or if a number of IP assets, for example, patents owned by different businesses, are required simultaneously for efficient manufacturing or servicing of a product. y Last but not least, a licence agreement allows the licensor to retain ownership of the IP and at the same time to receive royalty income from it, in addition to the income from its own exploitation of it in products and services that it sells. The risks of licensing out include the following:


A licensee can become the licensor¶s competitor. The licensee may µcannibalize¶ sales of the licensor, causing the latter to gain less from royalties than it loses from sales that go to its new competitor. The licensee may be more effective or get to the market faster than the licensor because it may have fewer development costs or may be more efficient. The licensee may suddenly ask for contributions, such as technical assistance, training of personnel, additional technical data, etc. All this may simply prove



too expensive for the licensor. It is important that the licence agreement clearly defines the rights and responsibilities of the parties, so that any future disagreements can be quickly and efficiently resolved. The licensor depends on the skills, abilities and resources of the licensee as a source of revenue. This dependence is even greater in an exclusive license where an ineffective licensee can mean no royalty revenue for the licensor. Contractual provisions for minimum royalties and other terms can guard against this, but it is still a concern.

Advantages of licensing for the licensee
There are various ways in which a license agreement can give the licensee the possibility of increasing revenues and profits, and of enlarging market share: y There is often a rush to bring new products onto the market. A license agreement that gives access to technologies which are already established or readily available can make it possible for an enterprise to reach the market faster. y Small companies may not have the resources to conduct the research and development necessary to provide new or superior products. A license agreement can give an enterprise access to technical advances that would otherwise be difficult for it to obtain. y A license can also be necessary for the maintenance and development of a market position that is already well established but is threatened by a new design or new production methods. The costs entailed in following events and trends can be daunting, and quick access to a new technology through a license agreement may be the best way to overcome this problem. y There may also be licensing-in opportunities which, when paired with the company¶s current technology portfolio, can create new products, services and market opportunities.

Disadvantages of licensing for the licensee



The licensee may have made a financial commitment for a technology that is not µready¶ to be commercially exploited, or that must be modified to meet the licensee¶s business needs. An IP license may add a layer of expense to a product that is not supported by the market for that product. It is fine to add new technology, but only if it comes at a cost that the market will bear in terms of the price that can be charged. Multiple technologies added to a product can result in a technology-rich product that is too expensive to bring to market. Licensing may create technology dependence on the supplier, who could choose to not renew a license agreement, to negotiate license agreements with competitors, to limit the markets in which you may use the licensed technology or to limit the acts of exploitation allowed under the licensing agreement.


What's the difference between franchising vs. licensing a business? Is a license business model really different from a franchise business model? The starting point in the analysis is to consider the legal aspects, then the business aspects. A franchise always includes a license of the brand and operating methods, along with assistance (training, an operations manual, etc.) or support (providing advice, quality control, inspections, etc.). A license that is supposedly "not a franchise" but contains these elements, is a disguised, illegal franchise with significant legal ramifications. In considering the legal aspects, begin with the following premise that applies to both options. If you put someone into business (or allow them to use your business brand/mark) this transaction will normally be a regulated activity, subject to substantial penalties for noncompliance. If it looks like a duck and walks like a duck, it's a duck. This guiding legal principle (and common sense), coupled with the business aspects of selling a franchise vs. a license (discussed below) will answer most questions.

Why does regulation exist? Arising from the ashes of documented past abuses, where tens of thousands of individuals lost all of their net worth by investing in nonexistent or worthless business endeavors, the government has devised two principal consumer protection mechanisms: (1)franchise disclosure-registration laws; and (2) business opportunity laws. The thrust of these laws is to require sellers to give potential buyers enough pre-sale information so informed investment decisions can be made before money changes hands, long-term contracts are signed and sizeable financial commitments are undertaken. Under federal regulations, a Franchise Disclosure Document or FDD covering twenty-three individual chapters and a hundred or more pages in length must be prepared and given to every potential buyer at least 14 calendar days before any contract is signed or money paid. It doesn't matter what terms are used by the parties in contracts or other documents to describe their relationship. For example, the contract may call the relationship a license, a distributorship, a joint venture, a dealership, independent contractors, etc., or the parties may form a limited partnership or a corporation. This is entirely irrelevant in the eyes of governmental regulators, in


particular the Enforcement Division of Federal Trade Commission (FTC). Their focus is not on semantics, but whether a small number of defining elements are present or not. Today sellers are subject to a complex web of regulations that differ from the federal level to the state level and differ widely from state to state. Firms or individuals that say calling it a ³license´ dispenses with legal regulations are delusional and wrong for at least three reasons: (1) Common Sense - if it was really that easy, everyone would be doing it that way. The 3,000plus companies that are franchising are not stupid. Many of them can afford the very best legal talent available. It's not a coincidence they're all franchising and not licensing; (2) Even if the relationship can be structured so it doesn't fall within the definition of a "franchise," the second regulatory protection mechanism - business opportunity laws (discussed below) - will certainly apply. And complying with these is a lot more expensive than going the franchise route; and (3) Any analysis must include federal law (franchise and business opportunity) as well as applicable state laws covering the same dual prongs (franchise and business opportunity). This all reminds me of some financial planners who still advise their U.S. clients that filing U.S. income tax returns is not required under their interpretation of the U.S. Constitution. It just doesn¶t work that way. Actually it does work, but only until the IRS catches up. The "licensing avoids franchise regulations" spin (which, not surprisingly, is not accepted in the legal community) also only works until the company gets caught. The logic (not) goes something like this: licensing arises under contract law, not franchise law and therefore franchise law doesn't apply. Sound's just like the "you don't have to file a tax return because tax laws don't apply" argument. Here's a real life example. A "licensing attorney" prepared a dealer license agreement and ignored the FTC Franchise Rule disclosure requirements. The dealers became disgruntled and hired a litigation attorney who sued the company for, not surprisingly, selling disguised illegal franchises. It cost the company $750,000 to go to trial in federal court to answer the question "Is our license contract an illegal franchise?" It's always a very expensive question to answer. Trying an end run around the franchise disclosure laws by calling it a "license" may be a cheaper way to go initially. But it's only a question of when (not if) you will be caught. Be prepared to spend mind-boggling amounts down the road when the disguised illegal franchise is challenged for what it really is. In a 2008 case, Otto Dental Supply, Inc. v. Kerr Corp., 2008 WL 410630 (E.D. Ark. 2/13/08) another disguised franchise vs. a license was at issue. The company claimed it sold just a license, not a franchise and the franchise laws didn't apply. It made a motion for summary judgment to have the case thrown out of court. The federal Eastern District Court ruled against the company and ordered the case forward. It said whether or not the license was really a franchise was up to a jury to decide. Juries apply common sense to the simple defining elements of a franchise. They are not swayed by semantic arguments like "licensing arises under contract law, not franchise


law and therefore franchise law doesn't apply." Another expensive franchise vs. license learning lesson. This is not to say licensing a business isn't a viable option in foreign (out of U.S.) transactions where U.S. laws don't apply - but these are a very small minority. Most transactions and contracts cover U.S. activities and residents, so the franchise vs. license question is an easy one to answer. Even inside the U.S. there are some situations where calling the relationship a "license" makes sense. Years ago, a company selling an education concept to university professionals called their contract a license. To comply with applicable laws, a full franchise disclosure document was prepared and registered. For strictly marketing reasons (academic professionals were used to licenses), the "franchise agreement" was called a "license agreement" within the many pages of the FDD franchise disclosure document. This approach is 100% legal. It's important to remember the list of required defining elements for a "franchise" is quite short, and although certain franchise exemptions and exclusions are available, the legal statutory framework was designed to pigeonhole these relationships into either a franchise or business opportunity box. Normal agreements used to license a business contain certain control and assistance provisions. Control provisions include things like the right to inspect, requiring reports, designating territories, mandating suppliers, methods of operation, etc. Assistance provisions include things like providing training, an operations manual, ongoing assistance, cooperative marketing, supply, etc. Under the regulations, the presence of ANY specified control OR assistance provision is enough to trigger the Franchise Rule. In fact, the title of the FTC Rule says it all: "Disclosure Requirements & Prohibitions Concerning Franchising and Business Opportunity Ventures." So, the focus must be on which box is better to use, not on how to avoid using either box.

Because regulation of franchising is at the federal and state level, the effect of state regulation must also be considered. The FTC Rule sets minimum standards and applies in all states, unless a particular state sets even higher standards (and some do), and then that state's law applies. In 1971, eight years before the FTC Rule went into effect, the State of California was the first to enact a franchise disclosure-registration law where a franchise registration process is required before franchises can be offered (i.e. advertised) or sold. The California Franchise Investment Law was in response to a wave of consumer franchise complaints. Other states soon followed California¶s lead, leading to a situation where companies selling franchises had to follow different rules in each franchise registration state. To alleviate these administrative difficulties and achieve a uniform format, a group of Securities Commissioners from various states adopted a Uniform Franchise Regulation, effective in 1977, known as the Uniform Franchise Offering Circular (UFOC) format. All states requiring franchise registration adhered to the UFOC format, a sizeable document also containing 23 chapters of information. None of these states accepted what was then known as the FTC's Basic Disclosure Document. To ease the obvious predicament created by UFOC vs. FTC format, the FTC allowed companies to use the UFOC format as an alternate to its Basic Disclosure Document. In 2007,


the FTC adopted its own version of the UFOC format, known as the Franchise Disclosure Document or FDD. The FDD format became the required format in all states beginning July 1, 2008.

THE BUSINESS ASPECTS OF FRANCHISING VS. LICENSING A BUSINESS The business aspects of the franchise vs. license and business opportunity options are relatively straightforward and make the decision even easier. It all boils down to image from a marketing standpoint. From a credibility standpoint, does your company want to stand toe to toe with the likes of McDonalds, Radio Shack, H & R Block and other franchised household names? These are the mental images formed in the mind when an average consumer hears the word franchise, along with familiar, highly-advertised slogans like "being in business for yourself, but not by yourself," "complete training," "support where and when you need it," etc. These triggers, coupled with the complete package of training, start up and ongoing support services offered by franchise companies, makes a franchise a highly attractive and valuable commodity in the eyes of the prospective buyer and hence an easier sale. The same results apply to firms that first sold "licenses" then switched to selling "franchises." Same business model, just a name change and an FDD. These companies report they attracted considerable interest and far more inquiries when offering "franchises" compared to when they offered "licenses." So, even from a business standpoint, the franchising vs. licensing a business question is easy to answer. Then there are the financial, bottom-line considerations. Sell a franchise and you're in a league where buyers are accustomed to paying initial franchise fees of $30,000 to $45,000. Sell a license and you're lucky to get half of these amounts. In addition, and as discussed above, a "license" is almost always an illegal franchise in disguise, a ticking bomb creating significant legal issues because the FTC Rule (and corresponding state franchise registration laws) were not followed.

Business opportunity ventures, when compared to franchises, suffer from definite image problems that translate into difficult marketing issues. If you ever need proof of this, just attend any business opportunity show or expo. You'll see a host of fly-by-night opportunities such as worm breeding in backyards, exotic plants raised in glass bowls, condom vending machines (not a bad idea these days) and the like, all promoted by loud, fast-talking, high-pressure salespersons. Does your company really want to be associated with these companies and the reputation they project? Poor image, coupled with the fact that business opportunity ventures typically provide little training and no ongoing support, make them a much more difficult sale to prospective buyers. In a business opportunity, the buyer is just thrown a ball, and it's entirely up to them how to run with it.


From both a legal and business perspective, the franchise vs. license choice should be an easy one to make. Doing it right the first time will save money and significant legal headaches down the road. The individuals prevalent on the internet who claim (via very unprofessional-looking websites) that merely calling the relationship a "license," are only paving the way for a future lawsuit. They are not looking through the lens of an expert with almost three decades of experience who has seen first-hand the havoc these disguised illegal franchises cause. They are also not recognized experts nor have they taught other attorneys in this subject area. Instead, they are attempting to make easy money - at your expense. From the most basic, common sense perspective, if it looks like a Duck, talks like a Duck and walks like a Duck - . . . it's a Duck. The ultimate irony here is companies that sell illegal franchises by calling them a license are only shooting themselves in the foot. The marginal savings achieved by doing it the wrong way creates a ticking, legal time bomb of epic proportions. Also, they can only sell a "license" at a 50% discount because the value of a license is considerably less than a franchise. By doing it right to begin with, they could have charged $30,000 to $45,000 as a franchise fee, which would have paid the franchise costs and avoided future franchise vs. license issues.



www.googleco.in www.clusty.com www.bizymoms.com/franchises/.../licensing.html - United States www.coollawyer.com www.franchiseindia.com www.franchising.com www.licensinginindia.com www.licensing.org www.britannica.com www.managementparadise.com www.hrpassion.com www.dogpile.com www.slideshare.com


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