last updated 09/12/2020
last updated 09/12/2020
Orb360 maximises the value of intellectual property rights for franchises
Franchisees pay for them, competitors try to copy them and the IRD may try to tax them. ‘That’s why it’s so vital to protect your Intellectual Property Rights,’ says Jay Changlani of Orb360. ‘But what are those rights, and how do you go about maximising their value while protecting them within your franchise?’
Orb360 is a mid-tier accountancy firm which specialises in franchise businesses. ‘We provide franchisors, franchisees and prospective franchisees with financial support from all angles,’ says Jay. ‘Our role is to help you stay on top of everything from cashflow and tax compliance to forecasting and future-proofing your business. And, for franchisors, it all starts with Intellectual Property Rights, or IPR.’
IPR are an essential part of all franchise agreements, which contain licences allowing franchisees to use such things as trade names; trademarks; image; reputation; exclusive rights of manufacture or sale; and goodwill.
‘How to use these rights, and protect them against misuse, are among the most important concerns of the franchisor,’ says Jay. ‘Because of this, before entering into any franchise relationship, a franchisor must ensure that all relevant intellectual property associated with the business is adequately protected.
‘Without protection, former franchisees may be able to use some or all of the systems or trademarks to compete with new franchisees, or competitors may adopt the franchisor’s intellectual property to boost their own operations,’ Jay warns. ‘This is particularly the case if the franchisor’s intellectual property is generic, or not distinctive enough.’
To guard against this, franchisors should obtain expert advice to ensure that any key trademarks are registrable and not open to challenge, and that any exclusive processes are also properly protected.
How much is your Intellectual Property worth?
‘If you are selling, buying, or licensing IPR, there are tax implications associated with transactions,’ Jay explains. ‘Orb360 Chartered Accountants can advise how your IPR can be listed as an asset, what value can be ascribed to it and how to treat it from a tax perspective.’
Evaluation of IPR can be a challenging process. Jay says that the three effective ways of valuation are:
This is the most used approach, which uses a product or service’s performance in the market to arrive at a valuation. Transactions involving similar products are also used for comparison purposes. Market value offers a relatively reliable valuation basis because it is based on supply and demand in the marketplace. However, when it comes to comparison with other products or services, there is usually not a great deal of information publicly available.
This approach values the IP on the basis of the financial income that IP is expected to generate and the costs of generating that income – in other words, the economic benefit to the business over the IP’s useful economic life.
Figures for risk and the financial cost are also calculated and included in the overall calculation. The result is what is known as the Net Present Value, or NPV. A prospective buyer can use this figure to help them make their purchase decision, which would depend on whether the NPV is positive or negative.
This uses the costs incurred by the business in the creation and development of their IP. It also considers the potential cost of recreating such an IP asset, or developing a product that is similar in nature.
The concept behind the cost-based method of valuation is that a business purchaser would not have to incur these costs if they buy the IPR. Furthermore, in doing so they would not have to suffer the financial and/or operational consequences of failing to successfully develop their own IPR, or deal with the potential difficulties in protecting it if they did develop their own.
New franchisors beware
While successful companies will generally have their intellectual property adequately protected, this may not be the case when the company starts franchising. In this case, Jay says, it may be necessary to develop new brands or trademarks, and use marketing material that consists of or includes copyrighted works.
‘Ultimately, all Intellectual Property Rights in the franchise must be properly protected before franchising,’ he concludes. ‘Talk to us here at Orb360 to see how we can help you maximise their value.’
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