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Aleck Ncube
THIS week’s write up aims to foster both greater awareness and greater appreciation of the role played by intellectual property in the franchising process.

At the heart of franchising is the licensing of Intellectual Property in conjunction with a proven business model. For the franchisor, franchising enables the faster expansion of his business.

For the franchisee, it provides for a better financial return with a lower risk than would otherwise have been possible without the benefit of a strong brand underpinned by a reputed trademark.

The vital role that franchising plays in business expansion, employment creation and overall economic development provides a lucrative avenue for SMEs to prosper.

Franchising is one of the fastest growing and most popular strategies for cost-effective and rapid expansion of a business, especially in cases where the business does not have or does not wish to use its own financial capital. While it draws on elements of the other business expansion strategies, a franchisee is a legally separate business (which is neither a joint venture nor a legal partnership with the franchisor) that replicates the successful business operations of the franchisor in other locations.

At the heart of franchising is the licensing of intellectual property.

What is franchising?
Franchising is where an entity (franchisor) that has developed a particular way of doing business expands the business by giving other existing or would-be entrepreneurs (franchisees) the right to use the franchisor’s proven business model in another location for a defined period of time in exchange for payment of initial and ongoing fees.

Along with the right to use the business model, the franchisor permits the franchisee to use the franchisor’s intellectual property and know-how and provides both initial and ongoing training and support.

In essence, a successful business is replicated and run by the franchisee under the supervision and control of, and with the assistance of, the franchisor.

The permission (i.e. the license) to use the intellectual property rights associated with the franchised business is granted to the franchisee to enable the latter to successfully run a replica of the franchised business.

The intellectual property rights that are licensed in a franchising arrangement almost always include trademarks and copyright, and often include trade secrets, industrial designs and patents — depending on the nature of the business.

In other words, the entire spectrum of Intellectual Property Rights. Successful franchisees in Zimbabwe that are operating include Nandos, Kentucky Fried Chicken (KFC) as well as Tiger Wheel and Tyre not forgetting the Ingwebu Beerhall Franchisees.

Franchising is another way of bringing a product or service to the consumer. As long as the underlying business model is sound, almost any type of business can use franchising as a way to enter new markets in a cost-effective manner. It is important for SMEs to understand that not all businesses are “franchisable”, however.

In order for a business to be a candidate for franchising it must be capable of being replicated. For the vast majority of businesses that can be franchised, there are three main types of franchise models.

They are as follows:

Product or Distribution Franchise:

– A product manufactured by a franchisor (or manufactured on its behalf by another company) is sold to a franchisee who, in turn, sells it to consumers under the trademark of the franchisor.
– Automotive and petroleum franchises such as Ford, Engen, General Motors, Ingwebu Breweries are examples of this type of franchise model, which is usually restricted to a particular geographical area, with the franchisee paying an initial franchise fee for the right to enter the franchise network.

In such franchise systems, no ongoing royalties are paid to the franchisor for the right to do business under the trademark. Instead, the franchisor derives a stream of revenue from the mark-up on sales to the franchisee.

Manufacturing, Production or Processing Franchise
The franchisor sells the franchisee an essential ingredient, or provides some specific know-how which, along with ongoing quality controls by the franchisor, enables the franchisee to manufacture or process the final product and sell it to retailers, or in some cases, to end consumers.

Coca-Cola operates in many markets throughout the world in this manner, supplying franchisees with the essential ingredient of Coca-Cola (which is protected as a trade secret), thus enabling the franchisees to produce the final product, which is then sold to retailers who, in turn, sell it to end consumers.

Business Format Franchising
The owner of a business (franchisor) licenses to another (franchisee) the right to use the particular business model, including the intellectual property rights associated with it, notably the trademark.

Internationally known brands such as McDonald’s, Holiday Inns and KFC are examples of companies that use this model. Business format franchising is the most widely used model. In many countries, business format franchising is the only type of franchising that is regulated.

Business format franchising comprises of four key elements

1. The franchisor allows the franchisee to use under licence its proprietary intellectual property, principally its trademarks, but also its designs, patents, copyright and trade secrets. The trademark is usually the most important element because it is the foundation on which the brand has been built ; brand recognition is what draws customers and stimulates demand. This makes the franchise attractive to would-be franchisees.

For example, if someone opened a Fast Food outlet and named it “Zikhali Chickens” success and annual sales would be difficult, if not impossible to predict. On the other hand, a franchise for the right to operate a “KFC” would be an almost guaranteed success and would generate an estimated US$ 240 000 in annual sales.

2. The franchisor controls the way the business is run and managed by the franchisee. Typically, this is done by providing the franchisee with a comprehensive operations manual, which reinforces and provides greater detail on all areas covered during the initial training program. Field visits, “mystery shoppers” or operational audits are the most common ways for the franchisor to ensure that its “system” is being adhered to.

3. The franchisor provides training, mentoring and ongoing assistance to the franchisee.

4. The franchisee makes both initial and periodic payments to the franchisor.

In short, franchising is a special type of licensing arrangement where the right to use the business model is supported by a licence to use the intellectual property rights associated with that business. In the next write up, I will look at the different types of Franchising Arrangements in greater detail.