Due Diligence
09 November 2012
Franchising and licensing are widely-known methods of doing business. We have reviewed in earlier parts of our series that chances for success and creating a fruitful business are better for a licensee/franchisee compared to those of independent business owners thanks to the numerous advantages these business systems enjoy. A franchise/license is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group of individuals wishing to use that mark/symbol/identification for a business purpose.
Once you have made up your mind to step in to the exciting world of being an entrepreneur or a franchisee/licensee, it is necessary to make sure that the prospective business is what all it promises to be and not a mere eye wash.
In order to make sure that the business is run in a hassle-free manner and at the same time that it survives the risks associated with the trade, it becomes imperative to follow some basic but vital steps before plunging into the business and putting a lot of money and effort at risk.
What exactly is meant by due diligence? The Merriam-Webster online dictionary explains due diligence as “the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property.”
It is therefore imperative that due diligence is performed with utmost care before taking a leap into the new venture, or one could end up risking everything.
Where do we start if we intend to conduct a due diligence exercise for a new licensing/franchising business? The first thing that comes to mind is the internet, the ideal place to begin with a due diligence process and to explore your product market. There is a high probability that useful information about the particular entity you wish to tie up with or the brand you intend to license may be readily available on the internet.
It also helps if you read and examine every bit and piece of news about the prospective franchisor/licensor, e.g., the core management team, its past sales history, quality management and other important aspects of their business plan before you actually sign any contract or make any payment to the franchisor/licensor.
A study and analysis of industry trends is also a must and should be conducted simultaneously. This industry analysis should be followed by looking at the competition in the market in detail and the potential competitors that could enter in the same trade. A deeper thought given to these market players and their business strategies could give you eminent clues as to where the market is headed in times to come. Further, It is advisable that special attention is given to the phased-out franchise and the ones likely to follow the trend in the market. It doesn’t make sense to plunge into a dying trend.
Similarly, the marks, logos and symbols to be taken up for licensing must be absolutely checked for their legal validity and ownership. A licensee should also check the licensed mark or symbol for any pending litigation matters and related conflicts which could hamper their usage by the licensee.
A legal check on the trademarks may at the same time provide the licensor with a chance to take into account its own trademark portfolio, revisit its current filing trends and develop strategy for future needs.
A trademark licensing agreement should therefore be put in place, keeping these issues in mind, and also to specify the territory or scope of intended coverage with the licensees along with the legal pointers essential to establish the validity of the intellectual property in its various forms.
It is very important to understand the philosophy and business strategy of each prospective company or IP owner you may tie up with, and compare their brand, goods or services with others in the same industry group. The most consequential source of information is current and former franchisees/licensees.
Honest answers about the whole franchising/licensing setup from any current or former franchisee/licensee could help you in determining whether your decision to move forward with the licensing/franchising deal is worth it or not and help you to close the deal faster.
Conducting due diligence is an important information-gathering process that will enable you as a prospective purchaser to assess the strengths and weaknesses of your target business, amend and negotiate any new terms of agreement, minimize risks and determine whether or not to proceed with the deal. Make sure you do it well.
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
