The failure to properly manage intellectual property ownership and control can create significant problems for franchisors seeking to sell their business or take on an equity investor.  IP ownership and protection is the first thing checked during any sale process or due diligence exercise.  

In the vast majority of franchise networks, intellectual property is the single most valuable asset.  If there are problems surrounding the ownership or protection of intellectual property these problems can have a significant impact on the value of the business.

The first challenge is to identify the items of intellectual property that contribute to the value of the business.  To capture all value it is generally necessary to look beyond the list of registered trade marks to consider all intellectual property used in the business.  In particular, it is important to consider the issue of copyright and ownership of intellectual property in items such as:

  • Product names, logos, slogans, phrases, colour schemes and tag lines;
  • Websites and domain names, including those relating to products;
  • Agreements, operations manuals, procedures, recipes and other written materials; and
  • Software, business processes, store lay outs and designs.

The next step is to establish ownership. This can be a problem if any of these items have been prepared by third parties, such as graphic artists, designers and consultants. Generally, copyright can only be assigned in writing.  It is not enough that the parties intended that ownership of the copyright in certain works were to be assigned to the franchisor once completed and paid for. An important exception to this rule is where the creator is an employee of the franchisor. Under an employment relationship, copyright that is created in the course of employment will generally be deemed to be owned by the employer (subject to the terms of employment).

The final challenge is to develop an IP protection strategy. For trade marks and domain names this may involve registration, but it should also involve monitoring for infringement by others. With the reach of the internet, consideration should be given to overseas registration, particularly in major markets such as the US and China.

In relation to copyright materials, franchisors need to ensure that the franchisor obtains an express written assignment of the intellectual property rights where third parties are engaged to develop them. In circumstances where the contractor is not willing to completely assign its rights, the franchisor should at least insist on a perpetual and transferable licence to use the intellectual property created. In these circumstances, it is also worth considering whether you need to restrain the contractor from providing the same or similar services to your competitors.

It is possible to obtain an assignment of intellectual property after the event, but negotiating an assignment after commencing a sale process can leave you exposed to opportunism by contractors that sense an opportunity to cash in. In the current market, where buyers and financiers are being very cautious about the businesses that they are prepared to invest in, it is important to ensure that franchisors are able to give potential investors comfort about issues as fundamental as intellectual property ownership.

Although there is often no immediate return on investment for the costs of obtaining assignments up front, in our experience the investment pays back in spades in the event of a sale or capital raising.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.