Franchise Operations: Are They Driven By Intellectual Property or Intangible Assets…?

Michael D. Moberly   August 12, 2008

Whether franchise operations are driven by intellectual property (IP) or intangible assets probably represents, for some, a classic case of ‘a difference without a distinction’.  But, the reality is, franchising is frequently and broadly characterized as an industry driven (economically, competitively) by IP, i.e., patents, trademarks, service marks, copyrights, and trade secrets.

Its fair to generalize however, that franchisors’ are likely motivated to devote:

1. more time addressing near term challenges i.e., (a.) licensing of trade-service marks the franchisor owns, (b.) recruiting prospective franchisees, and (c.) collecting royalties and fees, and

2. less time to identifying, utilizing, leveraging, and extracting longer term and more sustainable value embedded in – flowing from their intangible assets.

Collectively, these absolute near tern necessities (‘a’ above) frequently overshadow the relevance – importance of the longer term (‘b’ above) but, equally important necessity to recognize valuable contributions – value flowing from a franchises’ other, and often times under-the-radar, intangible assets! 

Intellectual property of course consists of concepts, processes, and certifications most decision makers possess some familiarity which they can readily turn to legal counsel to address.  Intangible assets, on the other hand, are (a.) less straightforward, (b. still relatively new concepts in terms of business application, and (c.) there’s seldom an intangible asset specialist readily available, but, nevertheless much needed, epecially now, for decision makers to readily turn for counsel and execution.  After all, intangible assets have surpassed tangible (physical) assets as the primary source of value, revenue, and future wealth creation for most companies.  This is especially true for franchise systems!

The two broad questions – issues I’m presenting in this post are (1.) how much of a franchise operations’ revenue and royalties are attributed specifically to licensing its intellectual property, and (2.) could additional revenue be extracted and foundation laid for more sustainable strategic value and worth if ‘under-the-radar’ intangible assets being produced were consistently identified, managed, stewarded, and leveraged?

After engaging numerous franchise operations and examining literally scores of UFOC’s (Uniform Franchise Operating Circulars) I hold the view that franchises’ are not so much driven by their intellectual property, as they are driven by their intangible assets!  IP tends to be singularly focused, i.e., a patent, a trademark, a service mark, a copyright, or a trade secret, whereas intangible assets are characterized as…

1.  unique blends (collections, combinations) of activities, assets, relationships, history, and market conditions that an organization exploits in order to differentiate itself from its competitors and thus create value.  (Michael Porter)

2.  economic benefits anchored in distintive features or processes that set a company apart from its competitors.  (Michael D. Moberly)

3.  evolving over time within an organization and may not always be the result of a planned action or the product of specific capital allocation decisions.  (Brookings Institution, Intangibles Project)

For franchisors, characterizing their franchises’ value and sources of revenue as stemming from – being rooted primarily in intangible assets, of which IP is one component, lays an important foundation:

   – for recognizing that issues – decisions related to intangible assets and IP are not exclusively legal issues or processes, rather they’re business decisions with fiduciary responsibilities.

   –  to put in place more efficient, effective, and less costly processes and procedures (that extend beyond conventional IP protections) to sustain (protect, preserve, monitor) control, use, ownership, and value of those assets.

Remember, its an economic fact – business reality that today, 75+% of most companies’ value, sources of revenue and future wealth creation lie in intangible assets!


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