Intellectual Property Rights: franchise rights, dealerships and licences
The concept of a franchise or dealership is fairly simple. It enables the franchisee or dealer to start up in business with the backing of an existing organisation.
FranchisesIn Wadlow, the Law of Passing Off, 3rd edition, 2004 at 475 franchising was described as:
……a relationship in which numerous legally independent businesses trade under a common style and to common standards as if they were branches of one large enterprise. The franchisor invariably specifies the manner in which each franchised business is to trade, often in great detail, although the day-to day running is left to the franchisee. The element of operational control typically distinguishes franchising from simple licensing arrangements. The success of any franchising operation depends on the public relying on the individual outlets of the franchise to provide goods or services of a uniform degree of quality. The public may frequently be unable to distinguish franchised businesses from those run as branches of a single business, and in some cases there may be a mixture of franchised outlets and branches owned and operated by the franchisor.
A franchise is essentially a contractual arrangement between two independent entities with a view to each making a profit from the synthesis of the franchisor’s business format and the franchisee’s business.
The franchisor will be the owner of the registered trade marks, intellectual property rights, goodwill and whatever else may be distinctive of the business and will derive income from granting rights to franchisees for the use of those assets for a period of time specified in the franchise agreement. That income may take the form of a lump sum payment on the grant of a franchise and/or a percentage of the franchisee’s turnover or profits. In addition, the franchisor may provide premises, equipment, stock or raw materials in return for payments from the franchisee.
The franchisee will normally be the proprietor of the franchised business and will be responsible for the employment of staff, purchase of goods or materials and the provision of sales and services to customers.
By virtue of the terms of the franchise agreement a franchisee will be in a position to exploit the franchisor’s goodwill in the business format although he will not own an interest in it. However, it is possible that some goodwill may be generated in the franchisee’s business. This follows from the decision in Balloon Promotions Limited v Wilson, SpC524/06  STC (SCD) 167 in which the Special Commissioner found that the question of whether a franchisee owns goodwill is determined principally by an examination of the facts concerning the terms of the franchise arrangement and the transactions dealing with its sale. Accordingly, whether a franchisee owns goodwill is a question of fact which will need to be established in each individual case. HMRC’s view is that the extent to which a franchisee is able to generate goodwill in a franchised business depends on the specific terms of the franchise agreement and the degree of control exercised by the franchisor.
The rights of a franchisee under a franchise agreement are an asset within the meaning of TCGA92/S21 (1). That asset is separate from any goodwill that may exist in the franchisee’s business.
An initial payment on the grant of a franchise will usually be treated as capital expenditure on the acquisition of franchise rights in relation to the franchisee even though it may be treated as an income receipt in the hands of the franchisor, see BIM57600 onwards.
If a franchise agreement indicates that the life of the franchise will not exceed 50 years the wasting asset provisions in TCGA92/S45 - TCGA92/S46 may apply, see CG76700+.
Franchise rights are not within any of the classes of assets within TCGA92/S155 for roll- over relief purposes.
Where a franchised business is disposed of as a going concern together with the benefit of the rights under a franchise agreement care must be taken to distinguish between the consideration attributable to the disposal of franchise rights and the consideration attributable to the disposal of goodwill. Guidance on the circumstances in which an apportionment or a re-apportionment of consideration can be made is given at CG14771.
DealershipsA business operated under a dealership agreement may be similar in some respects to a franchised business except that the dealer is likely to have a greater degree of freedom in the operation of his business than is normally the case in a franchised business.
The rights of the dealer under a dealership agreement are an asset within the meaning of TCGA92/S21 (1). That asset is separate from any goodwill that may exist in the dealer’s business.
If a dealership agreement indicates that its term will not exceed 50 years the wasting asset provisions in TCGA92/S45 - TCGA92/S46 may apply, see CG76700+.
LicencesIn relation to intangible assets, a licence is normally a contract under which in return for recompense or royalty a third party is granted permission to exploit the licensor’s intellectual property.
The rights of a licensee under a licensing agreement are an asset within the meaning of TCGA92/S21 (1). That asset is separate from any goodwill that may exist in the licensee’s business.
An initial payment on the grant of a licence will usually be treated as capital expenditure on the acquisition of the licence.
If a licence agreement indicates that its term will not exceed 50 years the wasting asset provisions in TCGA92/S45 - TCGA92/S46 may apply, see CG76700+.
Guidance on obtaining valuations of intangible assets including the rights under a franchise, dealership or a licence is given at CG68300+.
When sending your papers to Shares and Assets Valuation you should make it clear whether you require a valuation of goodwill in addition to a valuation of the rights under a franchise, dealership or licence or whether you require an apportionment of consideration between goodwill and the rights under a franchise, dealership or licence.