As a prospective franchisee, when you are considering purchasing a franchise, it is always important to be aware of your ownership rights. Franchising is a unique business model, and you must understand the nature of the franchisor/franchisee relationship. In particular, who owns what elements of the franchise will often be a very prescriptive process. As a result, it is crucial you know how to protect your ownership interests. This article will set out how ownership commonly works in franchises and what you need to note as a franchisee.
Key Principles of Franchise Ownership
Before evaluating ownership, the first key point is that as a franchisee, you still own and operate your own independent business. The franchise relationship does not create any form of partnership or agency relationship between you and the franchisor. The exception to this would be if both parties expressly considered changing the relationship into, for instance, a joint venture. As a result, the franchisor does not have any interest in your business or any control beyond the terms of the franchise agreement.
Intellectual Property
Importantly, the franchisor will provide you with the right to use their intellectual property (IP) when running their franchised business. IP in a franchise agreement can include:
- trademarks and the franchisor’s branding;
- the business name;
- the franchisor’s image;
- marketing materials, including social media pages and accounts;
- the operations manual; and
- the franchisor’s systems, processes and ways of doing business.
Whilst you have a right to use this intellectual property during the term of the franchise agreement, this is merely a temporary licence that will expire when the franchise agreement ends. The IP owner, likely the franchisor, retains ownership, and you will not acquire any rights or interest in it. As a franchisee, you should also be aware that anything you create or improve using the IP will likely be automatically assigned to the franchisor. This provision is usually contained in the franchise agreement.
Continue reading this article below the formAssets
As part of running your franchised business, you will probably require certain key assets and equipment. For example, a mobile cleaning services business will require a vehicle, whilst a pizza restaurant franchise will require an oven. Your franchisor will likely list this necessary equipment and may include approved suppliers you can buy it from. Once purchased, those assets are your property and are owned by your business.
However, the franchise agreement may still dictate your rights regarding these assets. Whilst the franchisor will not own the assets, many franchise agreements may allow the franchisor to choose whether to purchase your assets upon the agreement’s end. In this case, how you will value these assets should be clearly outlined, and the franchisor should not have an unlimited timeframe in which to exercise this option. Be sure to carefully review this clause before signing your franchise agreement, as the terms may be unfairly in favour of the franchisor.
Customers
As a franchisee, you aim to develop relationships with your customers and build a loyal customer network. When your franchise agreement ends, you may hope to pursue a new business opportunity and rely upon those customer relationships. However, you should note that customer information and databases are considered to be the franchisor’s IP which will usually have to be returned at the end of the agreement.
Furthermore, your rights under any existing customer contracts will likely have to be assigned to the franchisor as well. Of course, customers still have the freedom to choose who they buy goods and services from. However, franchisors can further seek to limit who you can sell to through restraint of trade clauses in the franchise agreement. These state that you cannot operate in your former territory or service customers the franchisor has referred. In practice, restraint of trade clauses are very hard to enforce and are often used as more of a deterrent. As a result, you should consult a franchise lawyer on whether the restraint of trade clause is enforceable before soliciting former customers as an ex-franchisee.
Goodwill
A business’s value is derived from both tangible and intangible factors. Often, a business’s greatest value is in its ‘goodwill’. Goodwill is the business’s intangible value based on its reputation, branding and customer loyalty.
As a franchisee, you work hard to generate goodwill by building your franchised business’s reputation and loyal customer base. However, most franchise agreements will clearly state that you do not own this goodwill and that when the franchise term is over, the franchisor does not need to compensate you for any goodwill you generated. This is because goodwill focuses on the continued right to conduct business in a way that has successfully attracted customers. In a franchising context, this is, therefore, tied to the franchisor’s business model and intellectual property. As a result, it remains the franchisor’s property. The general exception to this rule is if you are transferring your franchised business to a new franchisee. In that scenario, the goodwill will be included in the sale price along with other assets.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Key Takeaways
Owning a franchise business can be an exciting opportunity. However, as a franchisee, you should be aware that whilst you operate your own business, the franchisor retains the ownership of most elements of the franchise. These elements include:
- the franchisor’s intellectual property, which is simply licensed out for a limited period of time;
- customer information, databases and contracts; and
- goodwill, except when you are selling your business.
If you need help understanding who owns what in your franchise, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
We appreciate your feedback – your submission has been successfully received.
