Professional Documents
Culture Documents
Franchising Vs Licensing
Franchising Vs Licensing
MBM-208
BUSINESS ENVIRONMENT
COMPARATIVE APPROACH OF
LICENSING AND FRANCHISING
SUBMITTED TO
DR. SANJAY BHUSHAN
SUBMITTED BY
ANJALI VERMA
DEPTT. OF MANAGEMENT
DEI
INDEX
S.No.
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CONTENTS
PAGE
NO.
INTRODUCTION
WHAT IS FRANCHISING?
FRANCHISING IN INDIA
DOES FRANCHISING PROVIDE
VALUE TO FRANCHISEES?
ADVANTAGES OF
FRANCHISING
CASE STUDY
WHAT IS LICENSING?
CASE STUDY
LICENSING IN INDIA
ADVANTAGES AND
DISADVANTAGES OF
LICENSING
FRANCHISING VS. LICENSING
BUSINESS AND BUSINESS
OPPORTUNITIES
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10
11.
CONCLUSION
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12.
REFRENCE
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INTRODUCTION
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 franchises.
Many new or prospective business owners mistakenly believe that the words franchisee and
licensee are synonymous. Theyre 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.
WHAT IS FRANCHISING?
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 continuing
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.
Background
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 worlds 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 franchisors 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 franchisors 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.
McDonalds best epitomizes the incredible power of franchising. Over time McDonalds learned
how to absolutely maximize the sales potential of a fast food outlet. Their concept is one with a
very high degree of systemization. McDonalds 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. McDonalds leaves nothing to chance or
employee discretion, there is a McDonalds way for everything and everything is done the
McDonalds way.
The core of their business is the strict adherence to QSC, or Quality, Service and Cleanliness.
Over time McDonalds 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 McDonalds 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 McDonalds are absolutely
intertwined, the better the franchisee does, the better McDonalds does. McDonalds doesnt sell
anything directly to the franchisees. All of McDonalds 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, McDonalds has a very strong franchise agreement that is biased in favor of
McDonalds, which is as it must be. If a franchisee doesnt adhere to McDonalds high
standards, McDonalds has the contractual power to force the franchisee out of the system.
McDonalds has never hesitated to do this if a franchisee has failed to bring its unit up to the
high standards of QSC required after being duly warned to do so.
McDonalds 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 get-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 its competitive advantage and market niche.
FRANCHISING IN INDIA
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
countrys 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.
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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.
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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
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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
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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?
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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:
Olympic Games
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.
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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.
Conclusion
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.
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LICENSING
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 companiesfrom Fortune 500 ones to startup companiesincorporate 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
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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.
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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 technologyparticularly when it involves patent infringement litigation
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.
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CASE STUDY
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.
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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 Indias 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 governments support of trademark protection
English is the official government and business language
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ADVANTAGES
LICENSING
AND
DISADVANTAGES
OF
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:
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.
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.
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.
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.
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.
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:
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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.
The licensee may have made a financial commitment for a technology that is
not ready to be commercially exploited, or that must be modified to meet the
licensees 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.
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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 license 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
doesnt 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
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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.
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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.
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CONCLUSION
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.
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REFRENCE
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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