Episode 15
E15: The Fine Line Between Certification and Franchising
Do I Want to Franchise? (Hint: No)
In this Episode I share a LinkedIn Live event that I hosted to talk about some important Intellectual Property (IP) concepts and concerns. If you have a professional services-based business, a clear path to scalability and salability is finding an effective way to license your personal IP. Simple right? Not in today’s world. Depending on the scope of the license, and any additional bells and whistles offered as part of the package, you could be setting up a franchise structure. While franchises aren’t necessarily bad, they are highly regulated, and the regulations vary from state to state, so it is not an optimal first step when monetizing your IP. In this podcast you will learn
- How an IP license is the optimal way to scale your services-based business
- The difference between types of licensing structures, like certification and franchising
- How to avoid crossing the line from certification to franchise
- As a bonus, I go through the importance of knowing if you own your IP and the trap of sublicensing.
This podcast goes over some of the key basics to IP as it applies to your business. If you are thinking about scaling up, and you want to look into whether and how to do it, I’d love to connect and work with you on taking your business to the next level. Contact me to learn more about how I can help.
Connect with Erin and find the resources mentioned in this episode at hourlytoexit.com/podcast.
Erin's LinkedIn Page: https://www.linkedin.com/in/erinaustin/
Think Beyond IP YouTube Page: https://www.youtube.com/channel/UCVztXnDYnZ83oIb-EGX9IGA/videos
Music credit: Yes She Can by Tiny Music
A Podcast Launch Bestie production
Transcript
Hello ladies.
Erin Austin:Welcome to this episode.
Erin Austin:Just a quick note to let you know that this episode was originally recorded as
Erin Austin:a LinkedIn live, where I had some nice slides to go with the conversation.
Erin Austin:So if you like to check those out, you can either see that you can see
Erin Austin:the recording on my LinkedIn page or on my YouTube page, and we'll have
Erin Austin:links to those in the show notes.
Erin Austin:Thanks.
Erin Austin:Hello, everyone.
Erin Austin:Thank you so much for joining me today.
Erin Austin:I do know some of you, for those of you who I have not met before.
Erin Austin:I'm Erin Austin.
Erin Austin:I'm a lawyer and consultant, and I work with, uh, the founders of
Erin Austin:expertise based businesses, where I help them harness their expertise to
Erin Austin:create scalable and saleable assets by creating IP based revenue streams.
Erin Austin:So today we're gonna talk about the fine line between
Erin Austin:certification and franchising.
Erin Austin:If you have followed some of my writings or some of my webinars,
Erin Austin:then you know, I've been talking a fair amount about licensing recently.
Erin Austin:And I've been talking about it because I love it as a way for the expert
Erin Austin:to add leverage to their business, meaning that they can increase
Erin Austin:their revenues and increase their profits, in a way that is scalable,
Erin Austin:and will ultimately create an asset that is saleable.
Erin Austin:And so it hits all the markers that I like to talk about when I talk about
Erin Austin:building a saleable business, building exclusivity into our business, and
Erin Austin:building predictability into our business.
Erin Austin:So the beauty of the license is that it is intellectual property.
Erin Austin:So of course IP is exclusive asset.
Erin Austin:it, strengthens your brand, and it also creates that predictability by having
Erin Austin:recurring revenue in your business.
Erin Austin:And those are the things that acquirer likes to see when they're looking and
Erin Austin:evaluating a business for purchase.
Erin Austin:So I am going to talk about licensing very quickly,
Erin Austin:just in case you haven't seen the prior presentations about what a license is.
Erin Austin:So asset, so licenses are typically about, in our context, we're
Erin Austin:talking about intellectual property.
Erin Austin:Not about real estate, which would be like the lease, or about equipment, which would
Erin Austin:be a rental agreement, but when you're letting someone borrow your intellectual
Erin Austin:property, you grant a license to them.
Erin Austin:So the license is that agreement between the two parties.
Erin Austin:The licenseor is the owner of the asset and the licensee is the
Erin Austin:borrower or the user of the asset.
Erin Austin:And then the licensee will pay a license fee to the licenseor to get
Erin Austin:that license, to use their asset.
Erin Austin:So there are different levels of licensing.
Erin Austin:There's the very basic license, like the license that I'm paying to use the stream
Erin Austin:yard, which I use for this broadcast.
Erin Austin:And so I am licensing best technology from them.
Erin Austin:Anyone who's got a credit card can get a license and use it and I can use
Erin Austin:it so long as I continue to pay them.
Erin Austin:So that's a very basic level of license.
Erin Austin:But there are also
Erin Austin:more, intensive uses that have more restrictions.
Erin Austin:And the two we're going to talk about today are certification and franchise.
Erin Austin:Those are both licenses, but different levels of intensity.
Erin Austin:So first is the certification.
Erin Austin:So when for our experts, with their expertise based businesses, they
Erin Austin:have some, uh, proprietary process.
Erin Austin:That they're using to serve their clients, and they may have other service providers
Erin Austin:who also want to borrow their expertise.
Erin Austin:And so you may be interested in creating a certification program
Erin Austin:around your proprietary process.
Erin Austin:So when we have that type of license, which we call a certification, we one have
Erin Austin:the license of your proprietary process and your trademark, assuming you have one.
Erin Austin:And then we also require some sort of mastery.
Erin Austin:So there'll be some training attached to it so that that licensee
Erin Austin:shows like, I actually know how to deliver your process competently.
Erin Austin:Cuz you don't want someone to degrade the value of your process
Erin Austin:by delivering it in a way that doesn't, meet, the client standards.
Erin Austin:So the characteristics of a certification.
Erin Austin:Again, it is a license and it will include the trademark and, the related materials.
Erin Austin:So let's say we're going to talk about a couple of examples
Erin Austin:that apply to consultants.
Erin Austin:So in a minute, I'm gonna turn to the certified value builder.
Erin Austin:And so value builder is a trademark.
Erin Austin:And so they also have the related materials.
Erin Austin:They have a software program, and so you get a license to use their
Erin Austin:trademark and their software.
Erin Austin:There is training portion to it.
Erin Austin:Again, we wanna make sure that our licensees know how to use our materials.
Erin Austin:Therefore they don't negatively impact the value of our trademark.
Erin Austin:You're gonna have some type of technical support.
Erin Austin:Um, it won't be as intense as the franchise, which we'll talk about
Erin Austin:later, but you still wanna make sure that they get their questions answered
Erin Austin:that you're updating materials, it's also very valuable to have an online
Erin Austin:community, recurring license fee, uh, and so there will be a license fee.
Erin Austin:So every time for every period that they're using your materials,
Erin Austin:using your license, then they're gonna pay you a fee for that.
Erin Austin:So it may be based on time, like an annual license fee or a monthly license fee.
Erin Austin:So it could be that on an annual basis.
Erin Austin:So I have to come back and get recertified and there's a
Erin Austin:fee for that recertification.
Erin Austin:So that would be a recurring fee there or a Ked based, some sort of
Erin Austin:royalty that's based on the usage.
Erin Austin:So let's say it's a training.
Erin Austin:You have licensed your training materials to them.
Erin Austin:And maybe, if they're training a thousand people, then their license
Erin Austin:fee might be different, might be based on the number of heads they're
Erin Austin:training, versus if they're just using it for their one on one clients, then
Erin Austin:it might be a different license fee.
Erin Austin:So the value builder certified, they are a software program and basically
Erin Austin:it's for professionals who like consultants, like financial advisors,
Erin Austin:attorneys, accountants, who work with businesses to help them increase
Erin Austin:the value in their business and for hopefully building it to sell.
Erin Austin:And so they have these drivers of value that when you're certified
Erin Austin:value builder, you can use their system to do these assessments.
Erin Austin:And then it kicks out a report that tells you how your client's business is doing.
Erin Austin:And then you work together with the client on creating more value in these drivers.
Erin Austin:And so here with value builder, they have a certification fee.
Erin Austin:That's something you pay up front , and then you go through their process and then
Erin Austin:you pay an annual or monthly license fee and you get access to their assessment
Erin Austin:process and their report process.
Erin Austin:So that would be a pretty standard certification program.
Erin Austin:So with franchise, we're gonna look at the similarities and differences,
Erin Austin:but just generally it is a much more intense use of a license.
Erin Austin:Again, it's still a license, but instead of just licensing a trademark and some
Erin Austin:materials, it is the entire business.
Erin Austin:It's a complete turnkey business.
Erin Austin:It has operations, it has branding, it has marketing that comes with it,
Erin Austin:territory specific a lot of times.
Erin Austin:The fees are of different magnitude.
Erin Austin:Typically it's an investment really more than just a fee.
Erin Austin:And then you would have revenue sharing with it as well.
Erin Austin:Your franchisor is interested in, you know, they're marketing you, they're
Erin Austin:providing all the support, so they wanna participate in that upside.
Erin Austin:So there's that revenue sharing.
Erin Austin:That could also look like a marketing fee because they do
Erin Austin:your marketing for you as well.
Erin Austin:And they may get clients for you even.
Erin Austin:So, again, to maintain the quality of that brand, that you
Erin Austin:have to follow their systems.
Erin Austin:Every McDonald's is gonna be the same, every Starbucks is gonna be the same.
Erin Austin:The branding, the supplies, the distribution system
Erin Austin:everything's the same, right.
Erin Austin:And so, unlike a certification, that certification is just a contract.
Erin Austin:It is a license agreement.
Erin Austin:It is a contract.
Erin Austin:And so you put in there, whatever it is that you wanna put in there,
Erin Austin:you know, you negotiate those terms.
Erin Austin:A franchise is actually regulated by the states.
Erin Austin:And so that is why we don't wanna cross the line between a
Erin Austin:certification, which is a contract relationship and its certification,
Erin Austin:which is regulated by the states.
Erin Austin:And unfortunately it's regulated.
Erin Austin:Literally by each date.
Erin Austin:So there's not a federal franchise law,
Erin Austin:so every state has its own franchise laws.
Erin Austin:There's kind of four buckets that they go fall into.
Erin Austin:We're not gonna talk about them, but generally, these are the core
Erin Austin:elements that will turn a licensing relationship into a franchise.
Erin Austin:So, you have to have that trademark license, cuz there's that unified brand.
Erin Austin:The licenseor has significant control over the operations of the business or
Erin Austin:provides significant assistance over the running of the business, and that there
Erin Austin:is an upfront fee required, and that there is, and this is revenue sharing.
Erin Austin:So these are broad parameters just cuz if you're close to.
Erin Austin:Then we wanna take a much closer look.
Erin Austin:Different states have slightly different interpretations about
Erin Austin:what significant assistance is.
Erin Austin:and sometimes it can just be an association with, and so there's
Erin Austin:different things to look at, but if you have kind of these three
Erin Austin:things that trademark license, some significant involvement or association
Erin Austin:among the licensees and licensor,
Erin Austin:and something that looks like a revenue share, then we really
Erin Austin:wanna make sure that we're not accidentally becoming a, a franchise.
Erin Austin:So H and R block is an example of a franchise.
Erin Austin:H and R block is a tax prep
Erin Austin:franchise, and it is the whole business.
Erin Austin:H R block requires you to have a brick and mortar location.
Erin Austin:So you have to sign a lease, you have to use their trade dress, meaning,
Erin Austin:you know, the fixtures and things that they have, their signage,
Erin Austin:and then they have their operations manual.
Erin Austin:So that would be your franchise.
Erin Austin:So, what is the difference on kind of a macro level?
Erin Austin:And again, there's always nuances, but on a macro level, I like to
Erin Austin:think about it, is it a menu item or is it the entire restaurant?
Erin Austin:So if we go to the value builder versus.
Erin Austin:H and R block.
Erin Austin:So, the value builder, I'm a lawyer or an accountant or coach or consultant.
Erin Austin:I have my business, but I wanna add the value builder assessment.
Erin Austin:I wanna become certified in the value builder assessment process.
Erin Austin:That is just a menu item.
Erin Austin:I'm still Erin Austin accounting services,
Erin Austin:but I am also certified to do the value builder assessment.
Erin Austin:So that is a menu item versus the entire restaurant.
Erin Austin:There cannot be an H and R block inside of Erin Austin accounting.
Erin Austin:There cannot be a dominoes inside of Andy's pizzeria.
Erin Austin:Like it has to be the entire business.
Erin Austin:And so if you look at your program, what you propose to license as being
Erin Austin:the entire business, or just a menu item, that's a good indicator of whether
Erin Austin:it's a certification or a franchise.
Erin Austin:So they both are license agreements.
Erin Austin:They both involve licenses, including the trademark similarities.
Erin Austin:They both have control over the trademark usage.
Erin Austin:You never wanna lose control over your trademark, no matter what the
Erin Austin:usage, whether it's certification program or other, you always wanna
Erin Austin:control how your trademark is used.
Erin Austin:There's going to be some kind of balloon payment up front of some sort.
Erin Austin:In the certification,
Erin Austin:it's something that you don't need to get a second mortgage
Erin Austin:for it's a certification fee or a training fee to get that training.
Erin Austin:In the franchise, it really is an investment, especially if it's
Erin Austin:a brick and mortar franchise.
Erin Austin:The way that the licensor gets paid, it is on a recurring, ongoing
Erin Austin:basis for use of that license.
Erin Austin:But on a certification side, it's a recurring license fee, you know, based
Erin Austin:on time or, based on recertification.
Erin Austin:Whereas on the franchise side, it's typically a revenue share, a
Erin Austin:marketing fee, that kind of thing, where they are participating in
Erin Austin:the operations of your business and
Erin Austin:for the, independently run certification, it is an independently run business.
Erin Austin:It's a menu item, it is not the business, right?
Erin Austin:So Erin Austin, accounting, still, I have my own business, I do my own
Erin Austin:thing, but I also have that value builder assessment that I can offer you.
Erin Austin:On the franchise side, your operations are dictated by your franchise
Erin Austin:agreement, your H and R block,
Erin Austin:you do things their way.
Erin Austin:I have my own brand in my accounting firm and I cannot use the value
Erin Austin:builder trademark in my name.
Erin Austin:I can't call myself value builder accounting.
Erin Austin:But I can use that trademark on my site that shows I'm a certified value builder
Erin Austin:consultant, but it's not my brand name.
Erin Austin:It's not my company name.
Erin Austin:Whereas on the H and R block side on the franchise side, it is the name
Erin Austin:of the business is H and R block.
Erin Austin:And the trademark is the business name.
Erin Austin:And you have that unified brand.
Erin Austin:You have a license that renews annually.
Erin Austin:Yes, there is some investment in certification, but it's not, you
Erin Austin:know, A business make or break number.
Erin Austin:And so if you decide that, you know, it's just not for you, you walk away,
Erin Austin:and you just don't renew, right.
Erin Austin:Whereas on the franchise side, it is an investment and that fact that it is an
Erin Austin:investment is the reason that we have special franchise laws that apply, unlike
Erin Austin:the license, which is just a contract where just regular contract law applies.
Erin Austin:So I'll just say briefly that, you know, if you wanna avoid becoming an accidental
Erin Austin:franchise, some people also call it an unintentional franchise, three things to
Erin Austin:just kind of be super, super aware of.
Erin Austin:Do not tie fees directly to the revenue of the licensee.
Erin Austin:You, you would be the licenseor and this, all these examples, you're the licenser.
Erin Austin:Don't permit them to use your trademark in the business name if you have
Erin Austin:some sort of certified button that they can put on their website, great.
Erin Austin:But they do not use it in their business name.
Erin Austin:And then you don't wanna have any type of unifying brand elements,
Erin Austin:you cannot provide a massive amount of assistance.
Erin Austin:Um, but you can do a little bit, if we go to the value builder example, like
Erin Austin:you can get a newsletter from them.
Erin Austin:So I'm on the newsletter list of a colleagues who is
Erin Austin:a certified value builder.
Erin Austin:And so he sends out an newsletter that basically talks about the value
Erin Austin:builder podcast, kind of what's happening, the build to sell podcast.
Erin Austin:And so you have, you know, some marketing materials that you can
Erin Austin:use, but it's his business, his name, and he has his own consulting
Erin Austin:business that he does strategy work.
Erin Austin:And why does it matter?
Erin Austin:So it matters because franchises are highly regulated and
Erin Austin:they're highly regulated because they are the entire business.
Erin Austin:When we go back to our value builder versus H and R block, if I lose
Erin Austin:my value builder certification, I still have my accounting firm.
Erin Austin:Maybe it makes an impact.
Erin Austin:Maybe it doesn't, but life goes on.
Erin Austin:If I have set up an H and R block tax prep business, and I lose
Erin Austin:that license, my business is gone.
Erin Austin:I have lost all my investment.
Erin Austin:And so, so for that reason, it's very highly regulated.
Erin Austin:And where people get into trouble is where they think they
Erin Austin:have a certification problem,
Erin Austin:they don't follow the franchise law of rules, and those include some
Erin Austin:significant disclosure requirements.
Erin Austin:It's almost like a prospectus, like when you're doing a public offering, it's not
Erin Austin:that bad, but it's it's, but it's similar.
Erin Austin:And you haven't done those things, then that licensee who really was
Erin Austin:a franchisee has lots of remedies against you, including your lost
Erin Austin:profits and loss of their investment and things and penalties and interest.
Erin Austin:If things go south.
Erin Austin:And, you know, it's always about when things go south, so we wanna make sure
Erin Austin:that we are on the right side of that.
Erin Austin:So, what is the difference between a usage based license fee and a revenue share?
Erin Austin:So for the certification with a license fee, so let's say you are a trainer,
Erin Austin:so you do, I like to use the example of someone who does employee onboarding
Erin Austin:training, you know, so they do the sexual harassment training for every
Erin Austin:new cohort of employees that come in.
Erin Austin:And so you may do that on a one on one basis, so your license fee will
Erin Austin:be based on the number of people that are served using your materials.
Erin Austin:So if you are giving it to an auditorium of a hundred people or a room of 10
Erin Austin:people, that license fee is based on the a hundred people or versus the 10 people.
Erin Austin:so that is usage based, but it's not related to your revenue.
Erin Austin:Maybe that a hundred people is, you know, Nonprofit and you only
Erin Austin:charge them a thousand bucks for it.
Erin Austin:And maybe the 10 is for fortune 500 C-suite executives and you charge
Erin Austin:them, you know, $50,000 for it.
Erin Austin:So that would just be based on the number, the head count, not
Erin Austin:on what you received for it.
Erin Austin:And that would put you on the certification side versus if
Erin Austin:it is something where it is, you know, 10% of your revenue.
Erin Austin:So you charge, you know, was it a thousand dollars for the nonprofit and 10%,
Erin Austin:then they would get a hundred dollars.
Erin Austin:but for the C-suite, $50,000 fee, they would get, $5,000.
Erin Austin:So that would be usage versus revenue.
Erin Austin:And we don't wanna do revenue share unless you intend to be a franchise.
Erin Austin:Do I have to register a certification program with anyone?
Erin Austin:No, you do not.
Erin Austin:So unlike franchises, which are highly regulated, certification
Erin Austin:programs are contract created.
Erin Austin:And so it is a private transaction between the parties, the same as your
Erin Austin:services agreement with your clients.
Erin Austin:Um, your certification agreements, license agreements are private agreements
Erin Austin:between you and your licensees.
Erin Austin:And no, it does not need to be registered.
Erin Austin:Now, what you will have registered is your trademark of course,
Erin Austin:would be you'd have a registered trademark and your materials that are
Erin Austin:eligible for copyright protection.
Erin Austin:Of course you would register those as well, so that you have a full
Erin Austin:protection of intellectual property laws.
Erin Austin:If I wanna start my own licensing program that incurs some of the IP in
Erin Austin:the certification program under which I'm licensed, what are my restrictions?
Erin Austin:If you are using license material, In your current practice and you want to bundle
Erin Austin:up what you're currently doing and then certify third parties to do what you are
Erin Austin:doing, that would effectively make your licensees sub licensees of the place that
Erin Austin:you received your original materials from.
Erin Austin:Most likely,
Erin Austin:that, um, licensor does not permit you to create licensees.
Erin Austin:So you need to look at that original agreement, to see what you received,
Erin Austin:what rights you received under them.
Erin Austin:But I, I mean, I'm almost positive that it says you cannot further create
Erin Austin:a program and further sub license those rights that you get from them.
Erin Austin:That's a really good question because so many of us, um, we use some
Erin Austin:third party materials to deliver services to our end clients, and
Erin Austin:that's a hundred percent fine.
Erin Austin:That's exactly why we license them to provide services to our end clients.
Erin Austin:But we can't then use those same materials, unless it explicitly
Erin Austin:says that we can, to create sub licensees with those materials.
Erin Austin:All right, ladies.
Erin Austin:Thank you so much for joining me today.
Erin Austin:I have mentioned, uh, licensing in other presentations, so you
Erin Austin:can find them on my LinkedIn.
Erin Austin:and I think you can find 'em on my YouTube page, and so contact
Erin Austin:me if you can't find them.
Erin Austin:And I also have a handout, that kind of has this different intensities of
Erin Austin:licensing from that basic license to the certification, to the franchise.
Erin Austin:And so anyone who wants that, um, make sure you reach out
Erin Austin:and we can get that to you too.