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Using your intellectual property and intangibiles to help grow your business


 Remember that your intellectual property and intangibles are important assets. Take steps to protect them, just like you would anything else.

In today’s franchise world (particularly on the franchisor side) a business’s most valuable assets are its intellectual property and intangible assets. These require the same care and diligence in protection as fixed assets. You would never consider not repairing an integral piece of equipment for your business. Intangibles and intellectual property require the same type of significant maintenance.

Protection of Trademarks

Trademarks are one of the most important elements to a system. It is the common brand identity that attracts both customers and franchisees.

Let’s look at several ways to protect your intellectual property, particularly trademarks.

1. Obtain federal trademark registration for your system’s primary marks covering all important products and services offered through the system. For example, a retail concept that has a private label line of products should register its mark for those branded product items as well as for any additional services provided to customers. This expands the scope of the legal protection afforded to the overall brand.

2. Develop and distribute to the franchisees a standards manual for reproduction display of the marks in advertising signage and promotional materials. This makes it easier for franchisees to present the marks properly and improves consistency of the brand and its message to its customers.

3. Develop and distribute to the franchisees standard advertising templates for their use in local advertising and promotion. This also improves franchise compliance and consistency.

4. Obtain and maintain copies of all advertising and promotional materials generated by the franchisees which incorporate trademarks owned by the franchisor. This will enhance overall brand consistency and improve franchise compliance with branding standards.

5. The franchisor needs to maintain control of the brand’s Web site. The site can contain a store locator or individual pages within the site for each unit, but do not permit franchisees to maintain separate Web sites, as this makes it more difficult to maintain consistent presentation of the brand.

6. Train franchisees to notice and report possible infringements of the system’s trademarks. Franchisees should act as additional watch dogs to protect the brand. This benefits them as well as the franchisor.

7. Make sure your system’s Web site has an appropriate privacy policy. Also, make sure that data protection procedures are state of the art. If any part of your site is directed to young children, there are additional privacy and parental consent requirements. Failure to protect sensitive customer information, whether by the franchisor or a franchisee, could have serious repercussions for the system.

8. Make sure you maintain control over access to information that qualifies for trade secret protection. Follow up to make sure appropriate confidentiality agreements are signed. In general, limit access to highly sensitive materials.

These are just a few ideas you can use to protect your marks.

Enforcement Programs

If there are any problems with the marks or attempted infringement, you need to have an active enforcement program in place. The following are key elements to consider:

1. Send cease and desist letters to possible trademark infringement parties;

2. Keep a good record of all licenses; and

3. Make sure all trademark compliance and legal aspects of the trademark process are followed initially and are updated annually using an active compliance system.

Monitoring Intellectual Property

Dennis L. Monroe is a partner and the chairman of Krass Monroe, P.A., a law firm specializing in multi-unit franchise finance, mergers and acquistions, and taxation.

Dennis can be reached
at (952) 885-5999

Once you have established your intellectual property and developed an appropriate compliance and enforcement program, these assets become valuable assets and need to be properly maintained. There are a number of things that can be done to create financial resources through these assets. First there are niche lenders and private investment groups that are willing to advance funds and make loans using the intellectual property as security. These financial sources recognize the significant value of this property, and in many cases they are willing to use these assets to provide a franchisor with the additional funds it needs to grow.

When a franchisor is securing its general business operating debt, it needs to be careful the lender does not take a security interest in the intellectual property. There are specific requirements to actually have a perfected interest in the intellectual property, but in many cases the lender will file an all-encompassing UCC filing (which includes intangibles and any other assets owned by the company). The UCC filing can be somewhat problematic and needs to be limited.

Several years ago we saw several large royalty securitization transactions where a security was issued on the royalty stream (Arby’s). Recently Dunkin’ Brands and IHOP have completed effective securitization providing significant funding. This securitization process is very complicated and somewhat limited to larger transactions (in a future article we will explore the anatomy of these transactions) but that does not mean that other creative approaches are not available to the smaller franchisor. Specifically if a franchisor can adequately quantify the consistency of the royalty stream, this can be a wonderful way to leverage as much as three to four times the annual royalty stream through a senior debt facility.

It is tricky to perfect security interests but it is a process that can be done. One good point about senior debt financing is that there can be favorable interest rates and a matching of cash flow with debt payments. Additionally, if additional funds are needed, higher priced subordinate debt may be available through a second security position on the royalty stream.

The key to obtaining the maximum value for your franchise royalty stream is to have a consistency to the stream and have few, if any, defaults. If there are any issues, it is important to have a strong enforcement process for immediate compliance so that actions are taken to make sure that nonpayment in the franchise system does not become an epidemic. We have seen franchise systems where as much as half of the system is not paying their royalty payments. Obviously this non-payment greatly lowers the asset value of the royalty stream.

In summary, I hope there are three points you can take away from this article:

1. Make sure you are capturing and protecting all of your potential intellectual property, particularly trademarks.

2. Make sure there is a good enforcement process for the intellectual property and royalty stream.

3. There are lenders who will loan against both intellectual property and royalty streams. This may be a favorable way to grow your system.

Next month’s column will discuss the hot franchise companies that are attracting funding today.

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