IP is worth more than face value

Protecting IP might not be a franchise's first concern but, taking into account how much of its value is locked up in these assets, it's something it cannot afford to ignore

IP is worth more than face value

When you’re dealing with the day-to-day requirements of running a franchise, intellectual property (IP) might seem like a rather dim and distant concern. But it’s easy to forget just how vital it is to a franchise and how much of its value is represented by its manuals and secret sauce. Whilst any business needs to protect these assets, in franchising – where one is selling franchise packages to third parties – it is even more essential to ensure that this value is properly protected.

First of all, it’s important for a franchise to understand that IP isn’t a secondary concern; it’s what makes up the bulk of the value of its franchise package. “When you think about what the person’s paying for when they buy a franchise, it’s partly to do with the brand, it’s partly to do with the knowhow and it’s partly to do with the support that you get from the franchisor,” says Kate Legg, associate at Higgs & Sons, the law firm. The value of a franchise’s IP is far from just being an abstract figure because it represents all of the financial value that it is providing for its franchisees. “It’s one of the key reasons why somebody would buy a franchise rather than setting up as an independent business,” she continues.

Despite this, IP is often one of those things that gets missed by new franchises. Whilst corporate businesses spend huge amounts of time obsessing over protecting their IP, it’s easy for fledgling franchise offerings to fail to recognise the inherent value of what they’ve developing. “It’s quite easy to overlook IP because it’s not tangible,” says Legg. “Usually it’s the stuff that’s really obvious to the franchisor and, because it’s really obvious, they don’t necessarily appreciate what they’ve got.”

Appreciating the value that they’re sitting on, however, can be difficult for franchises because they haven’t necessarily been consciously developing these things as valuable assets in their own right. “Usually it’s evolved over a very long period of time,” says Legg. “Because it’s that gradual process, you don’t necessarily see how good it is or how big it is.” Given an offering is honed over time and is rarely considered as a conscious process of creating marketable IP, it can be easy to underestimate the value tied up in the franchise package.

But, even if a franchise does understand the value of its IP, valuing something and protecting that value are two wildly different things. “Protecting IP is very important but sometimes it’s easier said than done,” says Legg.

Typically the first things that people tend to think of when you mention IP are elements like branding and protecting these are comparatively straightforward. “If you think about the brand name or the logo, that’s dead easy because you can register a trademark,” Legg says. In slightly more complicated cases, additional protections might be required and so it is worth seeking advice on the best way to handle them, particularly when a franchise has created unique products or tooling. “There might be some networks where they’ve got patents or registered designs, there could be all kinds of things,” she continues. “It’s going to be unique to the specific network.”

However, there are elements of IP that are far more tricky to protect. “When you get to things like the knowhow and the contents of the manual, that gets a bit more difficult,” Legg says. A huge amount of a franchise’s investment goes into working out its model and processes but protecting these aren’t anywhere near as straightforward. Whilst copyright can protect the wording of a franchise’s operations manual, it’s important to recognise this is as far as it extends. “It’s just a right that stops people copying it,” Legg explains. “It’s just your specific version of it, rather than the overall ideas.”

This is one of the areas where a franchise is most at risk. A franchisee who has signed on the dotted line and is operating their own franchise has an incentive to protect these processes because it would be their own livelihood that will be damaged as a result. But it is outside this contractual period that the franchise’s IP is most at risk. “If you’re talking about a potential franchisee that hasn’t signed up yet, they’re obviously a big risk because they might have a look at it and think ‘I can do it myself’ and then not pay,” says Legg. “Equally if you’ve got a franchisee that’s just left the network, there’s certainly a risk that someone might want to continue using that IP without paying for it”

There are legal protections that one can put in place to prevent this. “At the beginning, you want to make sure that the potential franchisee signs a confidentiality agreement or a non-disclosure agreement before they see anything,” Legg says. Meanwhile, it’s vital to make sure that a franchise’s contracts prevent former franchisees using all of the insights they’ve gleaned to set up a competing business. “You want to make sure that your franchise agreement has got some fairly robust non-compete clauses in to protect against this.”

But, beyond the legal protections, Legg says there are also practical protections a franchise can put in place to protect this material. One of the main ones is not letting a potential franchisee look at the franchise manual too early in the process; whilst it’s reasonable that they will want to inspect it before signing, a franchise shouldn’t allow this right from the off. And certainly one shouldn’t allow an external party to walk away with copies of such sensitive material. “You’d expect there to be a right to inspect it at the franchisor’s premises,” she says. “You wouldn’t expect the franchisee to be able to take a copy and walk away with it.”

All told, IP is one of a franchise’s most vital assets. Learning to value this properly and protect it accordingly is an essential consideration for any franchise wanting to guarantee commercial success.”

Josh Russell
Josh Russell