A Win-Win Situation
28 November 2012
They say that when you own a franchise, “you’re in business for yourself, but not by yourself.”
In view of the underlying concepts and ideas behind brand licensing and franchising that we discussed last month in the first part of this series, we will continue to dig in to the various aspects of the trade and explore the parameters and salient features that make this area of the business world so lucrative. It is noteworthy that with the increasing growth in worldwide licensing and franchising activities – and the same becoming the fastest growing way of doing business in just about every country in the world – licensing and franchising is now being viewed as a strategic business tool.
In this continuation of the series, we will explore what makes licensing and franchising the most sought after tool for running a business. A closer examination reveals various advantages which make licensing and franchising a win-win option for both the licensor or franchisor and licensee or franchisee.
The advantage that tops the list in the franchising world is almost guaranteed monetary gains with minimum risk of failure involved. The next best advantage is conducting business with an established and well-recognized brand. Since the brand is already widely known, the need for marketing and advertising in order to gain recognition are negligible.
Running an already successful business requires in-depth industry knowhow, and a franchisee has access to this business method and technical know-how courtesy of the franchisor. Apart from the business know-how and the proprietary services and products, a franchisee also has the advantage of the ongoing research and development carried out in by the franchisor. Intellectual property which is unique to the franchisor, such as trademarks, copyrights, logos and designs, creative art works and trade secrets is another added bonus which the franchisee can use to its advantage, even though the franchisor remains the lawful owner of these IP rights.
More and more people who want to break out of the monotony of their normal jobs and want to be in a semi-self-governed environment have opted to become franchisees, experiencing the feeling of economic and psychological empowerment by being self-employed. The franchisor and franchisee share a mutual understanding with respect to various aspects of conducting the business. While the franchisor is obligated to assist and encourage the franchisee, the franchisee is obligated to maintain, develop and conduct the business in accordance with the strict systems and guidelines laid by the franchisor, which ensures the maintenance of quality standards. These guidelines may include but are not limited to imposition on price, appearance, and design standards. Any deviation from the company’s guidelines and best practices could cost the franchisor its years of branding and reputation.
Globally, brand extension through licensing accounts for a major portion of profit in the retail sector, representing an area of huge potential for brand owners. Brand licensing adds to business revenues by unlocking the value of any brand. Consider the time, energy and money an independent individual would invest in developing brand recognition, marketing materials, product purchasing programs and other related materials, and weigh the same against brand licensing, and the latter definitely emerges as a winner. The more lucrative advantages for the licensor include the penetration of new territories for their products and meeting the demand for these products by lending out their equities to manufacturers. While the licensee helps the licensor in achieving the above, it at the same time profits immensely from the financial gains of an already-recognized brand. Just like in franchising, where strict quality control is administered by the franchisor, similarly a brand owner must strictly monitor the quality of the goods or products manufactured and sold under its brand name in order to maintain its brand equity, an asset which largely determines the market value of many companies. The risk that the licensor’s entire reputation and goodwill may be damaged or destroyed by the act or omission of a single licensee tops the list of high-risk disadvantages here.
Although advantages are multiple, certain pitfalls in terms of the reputation of the brands and the franchisor being at stake cannot be ignored and should be watched for. Despite of the pros and cons inherent in licensing and franchising, this aspect of international trade is expanding and is being viewed as a major economic booster in the coming days. With expansion in the trade, certain trends are being created, which we will review in the next part of this series.
Lall Lahiri & Salhotra
LLS House, Plot No. B-28,
Sector - 32, Institutional Area,
Gurgaon - 122001, National Capital
Region, India
T: +91 124 2382202, 2382203
F: +91 124 4036823, 2384898
E: Rahul@lls.in
W: www.lls.in
