1

MBM-208

BUSINESS ENVIRONMENT

COMPARATIVE APPROACH
OF LICENSING AND
FRANCHISING

SUBMITTED TO SUBMITTED BY
DR. SANJAY BHUSHAN ANJALI VERMA
DEPTT. OF MANAGEMENT ROLL NO. 097603
DEI MBA 2ND SEM.

DATE OF SUBMISSION: 15.03.2010

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INDEX

S.No. CONTENTS PAGE

NO.
1. INTRODUCTION 3
2. WHAT IS FRANCHISING? 3
3. FRANCHISING IN INDIA 7
4 DOES FRANCHISING PROVIDE 10
VALUE TO FRANCHISEES?
5. ADVANTAGES OF 12
FRANCHISING
6. CASE STUDY 13
7. WHAT IS LICENSING? 14
8. CASE STUDY 22
8. LICENSING IN INDIA 23
9. ADVANTAGES AND 24
DISADVANTAGES OF
LICENSING
10. FRANCHISING VS. LICENSING 26
BUSINESS AND BUSINESS
OPPORTUNITIES

11. CONCLUSION 30
12. REFRENCE 31
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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. 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.

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.
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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 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
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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 “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 it’s competitive advantage and market niche.
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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 “get-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
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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
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.
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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
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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 400-
franchise 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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DOES THE FRANCHISING PROVIDE VALUE TO

FRANCHISEES?

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
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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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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:

 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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CASE STUDY- McDonalds

Introduction

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
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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

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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:

 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.
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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.

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.

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.
 18

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 companies—from Fortune 500 ones to startup companies—incorporate 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
 19

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.
 20

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 technology—particularly 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 non-
core technologies is not likely to have a negative effect on the company's normal, core business.
 21

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.
 22

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.

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.
 23

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

 24

ADVANTAGES AND DISADVANTAGES OF

LICENSING

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:

 A licensee can become the licensor’s competitor. The licensee may ‘cannibalize’
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.
 25

 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:
 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.
 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.
 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.
 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 ‘ready’ 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
 26

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.
 
FRANCHISING VS. LICENSING A BUSINESS
(FRANCHISE VS. LICENSE) AND BUSINESS
OPPORTUNITY EXPANSION OPTIONS

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.

BACKGROUND OF FRANCHISE & BUSINESS OPPORTUNITY LAWS

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,
 27

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 “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 3,000-
plus 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
 28

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.

STATE REGULATION OF FRANCHISING

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
 29

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.

THE BUSINESS ASPECTS OF FRANCHISING VS. BUSINESS

OPPORTUNITIES

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
 30

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.

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.
 31

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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