EPS- 3rd Unit half

Franchising

Franchising definition refers to a license or an agreement between two parties, which gives an
individual or an organization (the franchisee) the right to market goods and services using the
trading techniques and brand name of another organization known as the franchisor.
Technically, the contract binding the franchisor and franchisee is the ‘franchise.’ That said, it
commonly refers to the business operated by the franchisee. Both parties must adhere to the
agreement’s terms and conditions for a specific duration. Besides paying the initial fee to
purchase the franchising rights, franchisees must pay a part of the profits to the franchisor
through royalty payments.
The franchisee is responsible for managing the daily operations of the franchise. Moreover,
depending on its capabilities and performance, it earns profits or incurs losses.

Characteristics

1. Two Parties: This method involves the franchisor and the franchisee. Both of them sign a
written agreement.
2. Exclusive Right: The franchisor grants the franchisee the right to use their brand name,
trademarks, and techniques under specific guidelines.
3. Assistance: The franchisor supports the franchisee in critical areas like marketing,
technology, recordkeeping, staff training, etc.
4. Policies: Franchisees must operate the business according to the policies designed by
the franchisor. The former gives an undertaking not to engage in any competing
business. Moreover, per the terms of the agreement between the two parties, the
franchisee must not disclose any confidential information regarding the business.
5. Limited Period: Franchisees can use the franchisor’s brand name, trademarks, and
techniques for a period mentioned in the agreement, for example, seven years. Upon the
expiry of the contract, both parties may agree to renew the contract.
6. Payments: The franchisee pays an initial fee to the franchisor to acquire the license. In
addition, the former pays royalty fees to the latter.

Types

The following are the most common types of franchising relationships:

#1 – Product Franchises
In the case of these agreements, the franchisee has the right to use the franchisor’s brand
name, products, trademarks, etc. Manufacturers allow third-party operators to market and
distribute their products via this contract. Moreover, they control the way the retailers carry out
the distribution. In return, the franchisee pays the franchisor an initial fee and royalties.
#2 – Business Format Franchises
Business format franchises involve following a particular business format and the best
processes and practices associated with it. The franchisor expands its operations by providing
its well-established business concept or format. It guides the franchisee on how to launch and
operate the business.
#3 – Manufacturing Franchise
In this arrangement, the franchisor gives the franchisee (a manufacturer) the right to produce
goods under its trademark and brand name. This type of agreement is common among food
and beverage companies.
Examples of Franchising
Let us look at a few franchising business examples to understand the concept better.
Example #1
Franchising is expected in the case of fast-food restaurants. Individuals can observe that the
appearance of restaurants such as Papa John’s, KFC, McDonald’s, and Burger King in different
places is almost the same. Since these restaurants are all franchises, their owners use a similar
design for menus, exteriors, interiors, and branding. However, the cost incurred to own and
operate the franchises vary.
Example #2
Soft drink bottlers often acquire a license from soft drink companies to produce, bottle, and
distribute soft drinks. The franchisor provides the franchisee with the concentrate; the latter
distributes it to the regional production franchises after processing and packing.

Advantages
● This system expands franchisors’ network, thus increasing their goodwill.
● This method allows franchisors to get valuable feedback regarding customer choices,
requirements, and product popularity.
● Franchisors can expand their distribution chain quickly.
● Franchisees do not have to promote a product that much as they sell products under a
well-established brand name.
● The risk for franchisees is low as they sell products under a well-established brand
name.
● The franchisee’s financial investment is a source of capital for the franchisor.
● Franchisors can acquire local business knowledge from franchisees as the latter is
usually more familiar with the local practices and communities.
Another vital benefit of franchising is that franchisees operate on a business model with a
proven formula for success.

Disadvantages
● There’s a possibility that individual franchisees may tarnish the franchisor’s reputation
through poor customer service or substandard product quality.
● Franchisors require a lot of resources to help franchisees set up their business.
● Franchisees gain access to a lot of information regarding the franchisor. As a result,
there’s a risk that the latter may disclose some confidential details to a competitor. That
said, the contract between the parties prohibits franchisees from doing so.
 ● Franchisors impose various restrictions on franchisees; the latter must stick to the
business plan.
● Typically, one requires a substantial amount to acquire the rights to a franchise,
especially if the brand is trendy.
● Franchisees must stick to a fixed marketing and advertising model; there’s little room for
changes.

What Is Intellectual Property?

Intellectual property is a broad categorical description for the set of intangible assets owned and
legally protected by a company or individual from outside use or implementation without
consent. An intangible asset is a non-physical asset that a company or person owns.

The concept of intellectual property relates to the fact that certain products of human intellect
should be afforded the same protective rights that apply to physical property, which are called
tangible assets. Most developed economieshave legal measures in place to protect both forms
of property.

Types of Intellectual Property

Intellectual property can consist of many types of intangibles, and some of the most common
are listed below.

1. Trademarks

Trademarks are any phrases, symbols, logos, slogans, product packaging, or designs that
distinguish the origin of goods or services. Section 2(zb) of the Trade Marks Act of 1999 defines
a trademark to mean a mark that may be graphically represented and distinguishes one
person’s goods or services from those of others, including the product’s shape, packaging, and
colour combination. A trademark is often associated with a company’s brand. For example, the
logo and the brand name of “Coca-Cola” are owned by the Coca-Cola Company.

Several benefits of a trademark include:

1. Identification of the source of the goods and services;

2. Providing legal protection to the brand;
3. Guarding goods/services against counterfeiting and fraud.

While trademarking a certain word or phrase does not confer ownership of the word, it enables
the owner of such a trademark the right to determine how that particular word or phrase can be
used with respect to specific goods and services. The key to obtaining trademark protection is to
understand how the specific categories of goods and services the mark shall cover. It is advised
to avoid seeking trademarks that are merely descriptive of goods and services but are rather
unique, easier to protect and more likely to qualify for trademark protection.

As soon as the trademark is applied, one can start using the same. A trademark can be used as
“TM” for Goods, “SM” for Services and “®” for Registered Trademarks. These symbols enable
the consumer/competitors to know that the brand proclaims the right to a particular good or
service.

It is suggested for any trademark holder to actively take action against the infringers in order to
protect the interests and the reputation of the company.

2. Copyrights

Copyright is a person’s legal right to commercially exploit their original, tangible creative work,
and it prevents others from duplicating or reproducing it without permission. Copyright preserves
the expression of a concept rather than the concept itself. Section 13 of the Copyright Act, of
1957, protects original literary, dramatic, musical, and aesthetic works, as well as
cinematograph films and sound recordings.

Organizations can claim ownership of a work of an employee as the Indian Law allows
ownership through “work made for hire”. Copyright Act provides copyright to owners with
exclusive rights to reproduce the work, prepare imitative work, distribute copies of a copyrighted
work, transfer ownership or license to use the work and perform and display the work in public
to name a few.

3. Patents

A “patent” is an intellectual property right that protects any innovation. It is an exclusive privilege
that protects the rights of the inventor and prevents unauthorized use and theft of the registered
patent by third parties. A patent is a monopoly granted to the inventor on his creation for a set
time, allowing him to economically use and exploit it in the market to the exclusion of others.

The term “invention” is defined as any new and useful thing, whether it be art, process, method,
or manner of manufacture, the machine, apparatus, or another article, or any substance
produced by a manufacturer, including any new and useful improvement of any such thing, and
an alleged invention under Section 2(1)(j) of the Patents Act, 1970.

To receive a patent, one’s idea must meet the following requirements;

1. The subject matter must be patentable;

2. The idea must be ‘new’ and ‘useful’ and;
3. The idea must be ‘non-obvious’.

While patents are the most common type of intellectual property rights that come to people’s
mind when they think of IPR protection, patents can be expensive to obtain and maintain..
Licensing

Definition: Licensing is defined as a business arrangement, wherein a company authorizes

another company by issuing a license to temporarily access its intellectual property rights, i.e.
manufacturing process, brand name, copyright, trademark, patent, technology, trade secret, etc.
for adequate consideration and under specified conditions.

The firm that permits another firm to use its intangible assets is the licensor and the firm to
whom the license is issued is the licensee. A fee or royalty is charged by the licensor to the
licensee for the use of intellectual property right.

For example: Under licensing system, Coca-Cola and Pepsi are globally produced and sold, by
local bottlers in different countries.

In finer terms, it is the simplest form of business alliance, wherein a company rents out its
product based knowledge in exchange for entry to the market.

Why Licensing?

The overseas company enters into a licensing agreement with another company based in the
domestic country, for a specified period of time. The two primary reasons for entering in the
licensing agreement are:

● International expansion of a brand franchise.

● Need for commercialisation of new technology.

Generally, a firm opts for license its products, when the firm holds that the consumer’s
acceptance of the product is high. It helps the licensee to differentiate the product from other
products offered by the competitors in the market. Further, it also assists the licensing company
in reaching new customers at a low price.

Benefits and Limitations

In licensing, the licensor gets the advantage of entering the international market at little risk.
However, the licensor has little to no control over the licensee, in terms of production,
distribution and sales of the product. In addition to this, if the licensee gets success, the firm has
given up profits, and whenever the licensing agreement expires, the firm might find that it has
given birth to a competitor.
As a prevention measure, there are certain proprietary product components supplied by the
licensor itself. Although, innovation is considered as the appropriate strategy so that the
licensee will have to depend on the licensor.

On the other hand, the licensee acquires expertise in production or a renowned brand name. It
expects that the arrangement will increase the overall sales, which might open the doors to the
new market and help in achieving the business objectives. However, it requires a considerable
capital investment, to start the operations, as well as the developmental cost is also borne by
the licensee.