Licensing and Franchising

Increasingly, businesses are getting their products and services into global markets via licensing and franchise agreements. People and businesses sometimes own intellectual property (IP) that no one else has. The table below describes the main types of IP. Under a licensing agreement, the licensor (owner) agrees to let someone else (the licensee) use the IP of the licensor in exchange for a fee. 

A longer-term and more comprehensive way to access the global market is through franchising. In a franchise agreement, a party (the franchisee) acquires access to the knowledge, processes, and trademarks of a business (the franchisor) in order to sell a product or service using the franchise’s name. In exchange for the franchise, the franchisee usually pays the franchisor both initial and annual fees. Dunkin’ Donuts, Hilton Hotels, and 7-Eleven have all expanded into foreign markets through franchising. For example, a company called Jubilant FoodWorks paid Dunkin’ Brands for the exclusive right to open Dunkin’ Donuts shops in India.^[1] Dunkin’ provides Jubilant knowledge about how to run their donut business but it is up to Jubilant to follow Dunkin’s instructions, build the stores, hire staff, and hope that Indian consumers buy donuts.

Types of Intellectual Property[2]
	Trademark	Patent	Copyright	Trade Secret
What is legally protected?	A word, phrase, design, or a combination that identifies your goods or services, distinguishes them from the goods or services of others, and indicates the source of your goods or services.	Technical inventions, such as chemical compositions like pharmaceutical drugs, mechanical processes like complex machinery, or machine designs that are new, unique, and usable in some type of industry.	Artistic, literary, or intellectually created works, such as novels, music, movies, software code, photographs, and paintings that are original and exist in a tangible medium, such as paper, canvas, film, or digital format.	Information that has either actual or potential independent economic value by virtue of not being generally known and cannot be legitimately obtained by others.
What is an example?	Gatorade® for sports drinks	A new type of hybrid vehicle engine	Song lyrics to Beyoncé’s “Black Parade”	The recipe for Coca-Cola
Legal protection in the U.S.	Registering the trademark with the U.S. Patent and Trademark Office protects the trademark from being registered by others without permission and helps prevent others from using a trademark that is similar to yours with related goods or services.	Registering the trademark with the U.S. Patent and Trademark Office safeguards inventions and processes from other parties copying, making, using, or selling the invention without the inventor’s consent.	Registering the copyright with the U.S. Copyright Office at the Library of Congress protects your exclusive right to reproduce, distribute, and perform or display the created work, and prevents other people from copying or exploiting the creation without the copyright holder’s permission.	The owner of the information must make a reasonable effort to maintain the secrecy of the information. Federal law criminalizes the theft of trade secrets that would be used in interstate or global business.

Advantages of Licensing and Franchising

Licensing and franchising allow the involved parties to gain a competitive advantage in the market. The licensee/franchisee gets immediate brand recognition and may quickly overtake the competition by offering a product or service for which there is existing unmet demand. For example, a local sandwich shop may have a hard time competing when a well-known franchise like Subway opens nearby.

Also, because franchisees are provided an operations strategy in which processes, supply chains, training, and products are already in place, the new business can quickly begin efficient and profitable operations. For the franchisor, this arrangement enables them to gain inexpensive access to a new market, since the initial cost of the franchise is borne by the franchisee. Similarly, under a licensing agreement, all of the costs of production, sales, and distribution are the responsibility of the licensee. If financial capital is scarce, both approaches allow companies to have a global presence without heavy investments.

Disadvantages of Licensing and Franchising

These methods do come with some disadvantages. They are typically the least profitable way of entering a foreign market, since the profits go to the franchisee or licensee. Although the licensor or franchisor receives up-front money and/or a small percentage of future sales, the majority of the revenue remains in the destination country with the licensee or franchisee. Franchising requires a long-term commitment from the franchisor to provide ongoing support in the form of training, logistics, product development, and brand marketing.

Once a business begins to establish a global franchise presence, there is pressure to maintain the reputation of the brand and fiscal responsibility becomes more intense as the failure of the franchise now has global consequences. For companies selling licensing rights, there is a risk that their intellectual property may be misrepresented or used in a manner that could tarnish the brand’s image. Also, once a license to use an image or other intellectual property has been granted to a company in another country, the probability that unauthorized knock-off products will enter the market increases. For both franchisors and licensors, maintaining quality standards on a global scale is a massive undertaking.

---