The manner in which to engage in these activities is beyond the scope of this book, but some background is useful as you plan for the future.
Business Licensing
Some businesses develop a proprietary product, but do not necessarily want
to pursue manufacturing and distribution for that product. In that case,
your company may wish to pursue a licensing opportunity for the product.
In the licensing scenario, you or your company would grant a license to the
licensee for a period of years with a royalty back to you or your company.
Licensing royalties can be based upon gross or net revenues, an amount per
unit, or other variations. When you license your intellectual property, you
do not transfer your ownership rights, just the rights to commercially
exploit the property.
Once you grant a license, you are giving up some degree of control over
your property and how it will be brought to market. You should perform
due diligence on the prospective licensee to determine their financial history
and success in bringing products to market. Licensing can get your
product to market quicker, but that must be balanced against your loss of
quality control and dependence on the skills of third parties.
Licensing agreements can be drafted either broadly or narrowly, depending
upon the desires of the parties and their relative bargaining strengths. For
example, the license may cover a specific geographical territory or only
apply to one of the several applications of the product.
This cautionary approach is particularly applicable in the case of merchandise and character
licensing, in which the license is granted to a manufacturer of consumer
goods for using a recognized trademark or copyright, for example, in the
merchandising of the Disney characters.
Care must be taken in drafting license agreements that closely resemble franchises because you may be dealing with a hidden franchise that can lead to many legal headaches.
Technology licenses typically join the inventor or licensor with the company or
licensee that has the financial resources and marketing clout to bring the product to market. A technology transfer agreement may transfer the intellectual property rights with the understanding that the rights can come back or revert to the licensor if the licensee fails to meet its obligations and
objectives set forth in the agreement.
License to Success: Licensing is ultimately a
way to finance your product to market without having to
raise your own capital. Many successful companies have
used licensing as their entire revenue model, and have
never manufactured or distributed products on their own.
Business Franchising
Franchising is a well-known means of expanding your business while
transferring operational responsibilities to franchisees. The originating
company, known as the franchisor, builds its brand under one or more
trademarks or designs, documents a proprietary delivery system for its
product or service, and develops a training program for its prospective
franchisees. The franchisor generates income by the payment of franchise
fees and an ongoing royalty.
Alert!Most companies should not undertake a franchise strategy until the business
system is fully established and successfully operating in at least one location.
The Federal Trade Commission (FTC) defines a franchise using three
components:
(1) the franchisee’s goods and services are offered and sold
under the franchisor’s trademarks;
(2) the franchisee is required to make
a minimum payment of $500 to the franchisor; and,
(3) the franchisor
exercises significant control over or provides significant assistance to the
franchisee’s method of operation. The states have variations on the definition of a franchise, and you must comply with the laws of each state where you are selling franchises.
From a legal standpoint, the franchisor, through counsel, prepares a franchise
disclosure document and franchise agreement. The franchise disclosure
document, known as the Uniform Franchise Offering Circular (UFOC), is
similar to a PPM.
You can obtain a copy of the UFOC and other information
pertaining to franchise registration from the North American Securities
Administrators Association website at www.nasaa.org. From the main menu
pull down chart, navigate to the corporation finance page and click the
UFOC link on the left. The UFOC requires audited financial statements of
the franchisor, so it is best to organize your accounting systems from the
start to be ready for the eventual audit.
Unlike licensing, franchises are regulated by the states to varying degrees
and by the FTC at the federal level. The FTC prescribes certain minimum
disclosure standards and the states may require differing amounts of additional
disclosures. At present, fifteen states regulate the offer and sale of
franchises. In those states, the franchise must be cleared by the state before
offers or sales can be made. Once your franchise is launched, there are
ongoing state compliance issues that must be addressed and monitored
very carefully.
Many franchisors choose to grant area franchise arrangements where, for
example, multiple territories or whole states are granted to certain franchisee’s
subject to certain performance standards, such as opening a certain
number of units per year. International franchise operations are another way
to expand a domestic franchise network.
Franchisors may charge an up-front franchise fee in addition to a royalty
payment, and perhaps a cooperative advertising fee as well. The entire
process of designing and marketing a viable franchise and properly documenting
its legal requirements is a substantial undertaking.
There are companies, such as www.ifranchise.com, that provide consulting services for
franchises, and resource websites, such as www.franchise.com, that provide
information on franchising requirements. You should also visit the website
of the International Franchise Association at www.franchise.org.
SBA Opportunities: The SBA is a financing
source for prospective franchise owners if the franchise
system meets the SBA Eligibility Guidelines.
Business Opportunities
Business opportunities are a close cousin to franchising and multilevel marketing
(MLM) opportunities. A business opportunity typically involves the
sale or lease of products or services to a purchaser to enable that person to
start a business. Picture a vending machine business.
The seller may provide assistance in identifying locations or customer leads and providing supplies to
the purchaser. Business opportunity sellers typically make some guarantee
that the purchaser will derive more income from the business than was paid
for it, and require the payment of a sum of money by the purchaser, usually
under $500.
Nineteen states have business opportunity laws that generally require the
seller to file a registration statement and a disclosure document similar to
UFOC for franchises. Some states require a bond be posted.
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