Malcolm invests in a franchise, builds his business for a decade, and then the franchise relationship ends. Malcolm makes some changes — the color of the uniforms his staff wears, the shape and font of the logo, and the name of the business — and carries on his business as he always has.
How much legal trouble will Malcolm find himself in?
A franchise business investment brings the franchisee plenty of valuable assets, including intellectual property. There are usually different kinds of intellectual property involved, and understanding the differences can protect both the franchisee and the franchisor.
The first kind of intellectual property includes assets like trademarks. These items might include
- mascots or characters
- the “look and feel” of documents, websites, and products
- the content of documents, ads, and websites
- tag lines, slogans, and the like
- branded merchandise
Typically, these things belong to the franchisor, and the franchisee has permission to use them as part of the value received from the franchisor in exchange for the franchisee’s investment.
If the franchise relationship ends, the franchisee will no longer have the right to use this type of intellectual property, or anything close to it. Malcom might want to change the name of his business but use a very similar logo and signage so that his customers will still be able to recognize him, but he can’t legally do this. He can’t hire someone to re-draw the cartoon mascot, change its name from “Jimmy” to “Jerry,” and make his own promotional materials and TV spots using the sort-of-new mascot. He can’t keep the look and feel of the franchisor, even though he probably feels like the branding is really his by now.
Doing these things would allow him to benefit from the franchisor’s name recognition and reputation, even though he’s no longer paying for those things.
You probably would not be able to negotiate permission to continue to use this kind of intellectual property, however good you are at negotiations.
The other kind of intellectual property includes business systems and “know-how.” Malcolm will probably, after 10 years, be very knowledgeable about the goods and services he supplies to his customers. Even if he has been using the systems exactly as the franchisor laid them out, the knowledge of how to run the business is firmly in Malcolm’s head by now.
He might have some ideas about how to do things better, too. Many franchisees have their own ideas and have to resist implementing them, in order to protect the brand. Malcolm’s knowledge and training from the company might inform his independent business, and it could be hard for him to prove that he’s not using things he learned during his tenure as a franchisee.
This kind of intellectual property can be included in negotiations.
For example, the franchisor might include a non-compete clause that prevents franchisees from opening a similar business within a certain length of time after they end the franchise relationship. The franchisee might include a clause that stipulates that the franchisee is the owner of his or her “know-how” at the end of the relationship, and can’t be prevented from using it.
As with any negotiations, the time to plan for this situation is before you buy the franchise. Make sure you have an agreement about intellectual property included in the contract, no matter what your future plans may be at the moment.