Franchising and Licensing Two Powerful Ways to Grow Your Business in Any Economy_1

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Nội dung Text: Franchising and Licensing Two Powerful Ways to Grow Your Business in Any Economy_1

FRANCHISING & LICENSING THIRD EDITION
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FRANCHISING & LICENSING THIRD EDITION TWO POWERFUL WAYS TO GROW YOUR BUSINESS IN ANY ECONOMY ANDREW J. SHERMAN American Management Association New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C.
Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Sherman, Andrew J. Franchising & licensing : two powerful ways to grow your business in any economy / Andrew J. Sherman.—3rd ed. p. cm. Includes bibliographical references and index. ISBN 0-8144-7222-2 1. Franchises (Retail trade)—United States. 2. License agreements—United States. I. Title: Franchising and licensing. II. Title. HF5429.235.U5S54 2003 658.8 708—dc21 2003012749 2004 Andrew J. Sherman. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Printing number 10 9 8 7 6 5 4 3 2 1
To my ﬁrst franchisee, Matthew Harris Sherman, and to my wife, Judy Joffe Sherman. I thank them for their never-ending support and patience.
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CONTENTS Preface to the Third Edition ix Acknowledgments xi Part 1. An Overview of Intellectual Capital Leveraging Strategy 1 1 Leveraging Intellectual Capital to Create Growth Opportunities and Proﬁtable New Income Streams 3 Part 2. Franchising as a Growth Strategy 9 2 The Foundation of Franchising 11 3 Developing the Operations and Training Programs 21 4 Developing System Standards and Enforcing Quality Control 37 5 Federal and State Regulation of Franchising 59 6 Compliance 89 7 Structuring Franchise Agreements, Area Development Agreements, and Related Documents 105 8 Protecting the Intellectual Property of the Franchise System 135 9 Managing Disputes 165 10 Developing Sales and Marketing Plans 191 11 Taking Your Franchise Program Overseas 215 vii
CONTENTS viii Part 3. Financial Strategies 231 12 Business and Strategic Planning for the Growing Franchisor 233 13 Capital Formation Strategies 243 14 Management and Leadership Issues in Building a Successful Franchising Organization 281 15 The Role of the Chief Financial Ofﬁcer and Related Financial and Administrative Management Issues 297 16 Special Issues in Mergers and Acquisitions 317 17 Managing the Transfer and Renewal Process 333 Part 4. Alternatives to Franchising 345 18 Strategic and Structural Alternatives to Franchising 347 19 Structuring Licensing Programs and Agreements 361 20 Joint Ventures and Strategic Alliances 383 Appendix. Resource Directory: List of State Administrators and Agents for Service of Process 397 Index 429
P R E FA C E T O T H E T H I R D E D I T I O N It is hard to believe that nearly 15 years have passed since the publication of the ﬁrst edition of Franchising & Licensing in 1991. The impact of technology and globalization has had a permanent effect on the dynamics of the fran- chise relationship. When the manuscript was being written for the ﬁrst edi- tion in the late 1980s, I could not have envisioned the many changes in the evolution of today’s franchise relationships that can be managed or the diver- sity in the number of industries and companies that would pursue franchising as their primary growth strategy. It has been an honor to work with compa- nies launching franchising programs in dozens of different industries and at various stages of growth, ranging from start-up to Fortune 500 companies. At the time of this writing, global events and geopolitical concerns are overshadowing and restraining some of the many successes that the franchis- ing community has enjoyed since the publication of the second edition. We are in the middle of war with Iraq, we now live with the threat of terror attacks against our homeland following the events of September 11, 2001, our economy is as weak as it has been in over 10 years, and oil and energy prices are on the rise, making the cost of growing a business very high. In tough economic times, the development of creative strategies to leverage your intellectual capital becomes especially important. How have these conditions and events affected franchising and the over- all growth of a company? ❒ From the franchisor’s perspective, the weak capital markets have lim- ited access to the resources needed for more organic or traditional growth strategies, thereby making franchising the strategy of choice to accomplish growth objectives and brand-building. ❒ From the franchisee’s perspective, more families in a post-9/11 environ- ment (and with job losses averaging 300,000 per month) want to take greater control over their own destiny and are pursuing many different types of franchised opportunities as a way of owning their own business. ix
P R E FA C E T O T H E T H I R D E D I T I O N x ❒ The threats of domestic terrorism, coupled with a very strong residential real estate market, has fueled the growth of many different types of home improvement and home services franchisors as Americans invest more money in making their homes safer and more comfortable. This trend has not helped the hospitality and restaurant industries, unless carry-out or home delivery services are offered. ❒ Fears of terrorism at home and abroad have also slowed the pace a bit of international franchising expansion (although the number of attendees and exhibitions at the 2003 International Franchise Expo in Washing- ton, D.C., in April were just as strong as prior years). These fears have had an impact on franchise systems in the travel, hotel, car rental, and related industries. ❒ The ease of access to technology as well as a desire to avoid the hassles (and fears) of going to a shopping mall have fueled an increase in on- line sales of products and services, forcing franchising systems to offer sites that facilitate e-commerce as well as create a balance for sharing the upside of these new sales and customers with the franchisees in their systems. The improvements in Internet technology and travel/lo- gistics concerns have also changed the ways in which franchisees are being recruited and data gathered. The impact of the Internet on fran- chise sales (as well as the legal implications thereof) are discussed in new sections of Chapters 6 and 10 of this third edition. And yet, as volatile as the world and global and domestic economy have been since the publication of the second edition, franchising has remained relatively stable. Each year, hundreds of new companies launch franchising programs for the ﬁrst time and tens of thousands of families invest in the ﬁrst franchised business as the ﬁrst step in their journey toward achieving the American dream. Even with all of the new technology and all of the new developments, franchising is, and always will be, about mutual commitment, trust, fairness, and communication in a uniquely interdependent relation- ship that has helped fuel our economy for nearly 100 years. The factors discussed above help explain the rationale for the new sub- title to Franchising & Licensing: ‘‘Two Powerful Ways to Grow Your Business in any Economy.’’ History has shown that the leveraging of intellectual capi- tal can be an effective and capital-efﬁcient way to perpetrate business growth whether economic conditions are weak or strong. Companies of all sizes and in many different industries are realizing that their intangible assets can be a source of new revenue and proﬁt centers that can also bring greater control and predictability and loyalty to their distribution channels. The critical im- portance of adopting this more strategic perspective to the management and leveraging of intellectual capital is discussed in greater detail in the new chapters of this third edition. Andrew J. Sherman Washington, D.C. April 2003
ACKNOWLEDGMENTS The concepts and issues discussed in this book are the result of over 25 years’ experience in franchising, from both a legal and a business perspective. It would be impossible to thank all of the people with whom I have had the pleasure of working along the way. The support of my many loyal domestic and international clients and my colleagues at McDermott, Will & Emery, including Tim Waters, Grant Bagan, and Harvey Freishtat, deserve special mention. There are certain individuals whose time, hard work, support, and pa- tience should be acknowledged. I wish to thank Debra Harrison for her assis- tance in reviewing and editing several chapters and to Patricia O’Keefe for her assistance in updating Chapter 21. I owe special thanks to my assistant, Jo Lynch, who often serves as my right arm, and for her organizational skills and patience. The Franchising, Licensing and Distribution Department at McDermott, Will & Emery makes it happen on a daily basis. There are also certain well-recognized individuals in the franchising and emerging business communities who have been friends and mentors over the years. For their support, advice, and general friendship, I want to especially thank Bob Gappa at Management 2000, Jerry Darnell, John Rogers at Davis & Company, John Reynolds at the International Franchise Associa- tion, Tom Portesy and Richard Macaluso at MFV Expos, Verne Harnish of Gazelles, my partner of nearly ten years Al Schaeffer, Burt Alimansky at Ali- mansky Capital Group, Dr. Eckhard Flohr of EF*LAW, John May at New Van- tage Partners and Bill Keating at the Dickinson School of Law. Ray O’Connell of AMACOM Books was there as always to provide moral support in pulling this entire project together. He is an excellent orchestrator and sounding board. I also want to thank Mike Sivilli at AMACOM for his masterful editing, and Irene Majuk at AMACOM for her skillful media relations. Last, but certainly not least, I am grateful to my wife, Judy, and to my son Matthew, and daughter, Jennifer, who once again sacriﬁced time with me so that I could complete this manuscript. I couldn’t ask for a more supportive family. xi
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PART 1 A N O VERVIEW OF I NTELLECTUAL C APITAL L EVERAGING S TRATEGY
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C 1 HAPTER Leveraging Intellectual Capital to Create Growth Opportunities and Profitable New Income Streams Intellectual capital consists of human capital, intellectual property, and rela- tionship capital and are the key assets for driving growth in all types of eco- nomic conditions. The biggest challenge that many companies face is how to keep growing in a slowing economy. The focus of this book is on two key strategies— franchising and licensing—as methods for leveraging the intellectual capital of a company into new revenue streams, market opportunities, and proﬁt centers. For many years, companies of all sizes and in many different indus- tries did not understand how to harvest their intangible assets, and they tra- ditionally viewed these assets more passively as a way to defend market share instead of proactively as a source of new opportunity. The strategic views toward the use of intellectual capital have evolved in the boardroom over the past three decades, as described in Figure 1-1. Figure 1-1. The evolution of strategic views toward the use of intellectual capital in the boardroom over the past three decades. Traditional View IP assets enhance the company’s competitive advantage and strengthen its ability to defend its competitive position in the marketplace (IP as a barrier to entry and as a shield to protect market share) (Reactive and Passive Approach) Current View IP assets should not be used merely for defensive purposes but should also be viewed as an important asset and proﬁt center that is capable of being monetized and generating value through licensing fees and other channels and strategies, provided that time and resources are devoted to uncovering these opportunities (especially dormant IP assets, which do not currently serve at the heart of the company’s current core competencies or focus) (Proactive/Systemic Approach) Future View IP assets are the premiere drivers of business strategy within the company and encompass human capital, structural/organizational capital, and customer/relation- ship capital. IAM systems need to be built and continuously improved to ensure that IP assets are used to protect and defend the company’s strategic position in domes- tic and global markets and to create new markets, distribution channels, and reve- nue streams in a capital-efﬁcient manner to maximize shareholder value (Core Focus/Strategic Approach) 3
A N O V E RV IE W O F I NT EL LE CT UA L C AP ITAL LE VE RA GI NG ST RATE GY 4 As demonstrated in Figure 1-2 below, the harvesting of intellectual capi- tal is a strategic process that most begin by having the company’s manage- ment team and qualiﬁed outside advisors take an inventory in order to get a comprehensive handle on the scope, breadth, and depth of the company’s intangible assets. In these times of distrust and disappointment by share- holders in the management teams and boards of publicly held companies, corporate leaders have an obligation to these shareholders to uncover hidden value and make the most of the assets that have been developed with corpo- rate resources. The leadership of the company will never know if it has a ‘‘Picasso in the basement’’ unless it both: (1) takes the time to inventory what’s hiding in the basement and (2) has a qualiﬁed intellectual capital inventory team that is capable of distinguishing between a Picasso and your children’s art project. Once these assets are properly identiﬁed, an Intellec- tual Asset Management (IAM) system should be developed to ensure open communication and strategic management of these assets. At that point, the company is ready to engage in the strategic planning process to determine how to convert these assets into proﬁtable revenue streams and new opportu- nities that will enhance and protect shareholder value. The strategic planning process will help uncover opportunities for growth. Key questions include: ❒ What patents, systems, and technologies have noncompeting applica- tions that could be licensed to third parties to create new revenue streams, joint ventures or partnering opportunities, distribution chan- nels, or proﬁt centers? ❒ What brands lend themselves to extension licensing or co-branding op- portunities? ❒ What distribution channels or partnering opportunities can be strength- ened if the company has greater control of or provides additional sup- port and services to the channel? ❒ What types of growth and expansion strategies are being used by the company’s competitors? Why? ❒ Where are the strategic/operational gaps in the company’s current li- censing and alliance relationships? Figure 1-2. The harvesting of intellectual capital: A strategic process. Inventory of Intellectual Capital Assets Building Intellectual Asset Management (IAM) Systems Strategic Planning to Maximize IP Assets Franchising Licensing
L EV ER AG IN G I NT EL LE CT UA L C AP ITAL TO CR EAT E G R OW T H O P P O RT UN IT IE S 5 As you can see in Figures 1-3, 1-4, and 1-5, the strategic planning process will help identify the different types of protectable intellectual property and the ways in which it can be leveraged into new opportunities. The balance of this book is devoted to the various types of intellectual capital leveraging strategies, with a focus on business format franchising in Chapters 2 through 17, licensing in Chapters 18 and 19, and joint ventures and strategic alliances in Chapter 20. Figure 1-3. Identiﬁcation through the strategic planning process. Protectable Types of Possible New Opportunities and Intellectual Property Revenue Sources • Patents • New independent ventures • Trademarks (including brands and slogans) • Joint ventures • Copyrights • Licensing • Trade dress • Outright sale • Trade secrets • Co-branding • Distribution channels • Franchising • Show-how and know-how • Enter new markets • Website design and content • Sell products • Customer and strategic partner relationships • Licenses • Proprietary processes and systems • Cooperatives, consortiums • Knowledge and technical workers • Outsourcing Figure 1-4. Leveraging intellectual capital. Phase 1 Phase 2 Phase 3 Identify IP and Evaluate Commercial Develop the IP Go To Market Potential into a Commercial Product Create new Raw Prepare for Business Plan Capability Gap Go to Market external business IP New Business Development Assessment in for-profit subsidiary • Capabilities required? • Identify leadership • Product and market Create new • What are gaps and how • Staffing definition internal business will it fill them? • Agreements • Detailed market analysis area Preliminary • What partners can share • Licenses • Competitive analysis Screening the risk, expand • Investment decisions • Internal/external revenue potential, and business decision help fill in the gaps? • Risk factors • What is likely value • Financials Commercialization Screens sharing required to attract and retain partners? • Could this IP be transformed Prepare for into a product? Go to Market Product and Capability Gap New Product Create new - Does someone own this Market Analysis Assessment Rollout product with IP? existing business - Competing patent? • Staffing area • Product and market • What capabilities exist • Is the product needed by • Investment decisions definition within our business area the market? • Detailed market analysis to deliver this product? -Potential uses and • Competitive analysis • Are partners required? applications • Financials - Likely markets Prepare for Go to Market • Are there barriers to entry Licensing Type and Capability Gap licensing or License or sell to if we develop a product? Market Analysis Assessment sale third party - Competitive advantage • Is there revenue potential? • Create licensing or sales team • Type of license (idea • What capabilities are • Could someone make money • Sales team product, turn-key) required to manage doing this? • Develop licensing and leveraging • Customer and Market these licenses? team Analysis • How will we provide • Draft key leveraging • IP protectability analysis support? agreements • Financials
A N O V E RV IE W O F I NT EL LE CT UA L C AP ITAL LE VE RA GI NG ST RATE GY 6 As demonstrated in Figures 1-5 and 1-6, a key part of the intellectual capital planning process involves deciding your strategic development alter- native once the applications have been analyzed and after the ﬁt with your core business has been determined. Figure 1-5. IPPLA phase 2 analytical process. Research and Development Patents and Intellectual Trade Secrets Capital Fit with current businesses? YES NO Should we make this Fit with existing a new business? products and markets? NO YES NO YES Can we create a viable business internally? Create new License joint product within venture or sell existing YES to third party business area NO Create new Create new internal business external business division via spin-off or newly established subsidiary
L EV ER AG IN G I NT EL LE CT UA L C AP ITAL TO CR EAT E G R OW T H O P P O RT UN IT IE S 7 Figure 1-6. Phase 2 strategic options. Longer Create a new spin-off venture that involves seed investment from our firm Create spin-off entity where costs will Time to payback be shared with a joint venture partner License the product to a third party in exchange for an equity stake (instead of cash) Develop one or more business format franchising programs based upon current brands, technology, and systems Form a partnership Brand merchandising licensing Develop single product instead of multiple versions License technology to Shorter third party Low High Investment Required