Erin Austin00:00

Hello ladies. Welcome to this episode. Just a quick note to let you know that this episode was originally recorded as a LinkedIn live, where I had some nice slides to go with the conversation. So if you like to check those out, you can either see that you can see the recording on my LinkedIn page or on my YouTube page, and we'll have links to those in the show notes.

Thanks.

Hello, everyone. Thank you so much for joining me today. I do know some of you, for those of you who I have not met before. I'm Erin Austin. I'm a lawyer and consultant, and I work with, uh, the founders of expertise-based businesses, where I help them harness their expertise to create scalable and saleable assets by creating IP-based revenue streams.

So today we're gonna talk about the fine line between certification and franchising. If you have followed some of my writings or some of my webinars, then you know, I've been talking a fair amount about licensing recently. And I've been talking about it because I love it as a way for the expert to add leverage to their business, meaning that they can increase their revenues and increase their profits in a way that is scalable

and will ultimately create an asset that is saleable. And so it hits all the markers that I like to talk about when I talk about building a saleable business, building exclusivity into our business, and building predictability into our business. So the beauty of the license is that it is intellectual property.

So of course, IP is exclusive asset. it, strengthens your brand, and it also creates that predictability by having recurring revenue in your business. And those are the things that acquirer likes to see when they're looking and evaluating a business for purchase. So I am going to talk about licensing very quickly,

just in case you haven't seen the prior presentations about what a license is. So asset, so licenses are typically about, in our context, we're talking about intellectual property. Not about real estate, which would be like the lease, or about equipment, which would be a rental agreement, but when you're letting someone borrow your intellectual property, you grant a license to them.

So the license is that agreement between the two parties. The licenseor is the owner of the asset and the licensee is the borrower or the user of the asset. And then the licensee will pay a license fee to the licenseor to get that license, to use their asset. So there are different levels of licensing.

There's the very basic license, like the license that I'm paying to use the stream yard, which I use for this broadcast. And so I am licensing best technology from them. Anyone who's got a credit card can get a license and use it and I can use it so long as I continue to pay them. So that's a very basic level of license. But there are also

more, intensive uses that have more restrictions. And the two we're going to talk about today are certification and franchise. Those are both licenses, but different levels of intensity. So first is the certification. So when for our experts, with their expertise based businesses, they have some, uh, proprietary process.

That they're using to serve their clients, and they may have other service providers who also want to borrow their expertise. And so you may be interested in creating a certification program around your proprietary process. So when we have that type of license, which we call a certification, we one have the license of your proprietary process and your trademark, assuming you have one.

And then we also require some sort of mastery. So there'll be some training attached to it so that that licensee shows like, I actually know how to deliver your process competently. Cuz you don't want someone to degrade the value of your process by delivering it in a way that doesn't, meet, the client standards.

So the characteristics of a certification. Again, it is a license and it will include the trademark and, the related materials. So let's say we're going to talk about a couple of examples that apply to consultants. So in a minute, I'm gonna turn to the certified value builder.

And so value builder is a trademark. And so they also have the related materials. They have a software program, and so you get a license to use their trademark and their software. There is training portion to it. Again, we wanna make sure that our licensees know how to use our materials. Therefore they don't negatively impact the value of our trademark.

You're gonna have some type of technical support. Um, it won't be as intense as the franchise, which we'll talk about later, but you still wanna make sure that they get their questions answered that you're updating materials, it's also very valuable to have an online community, recurring license fee, uh, and so there will be a license fee. So every time for every period that they're using your materials, using your license, then they're gonna pay you a fee for that. So it may be based on time, like an annual license fee or a monthly license fee. So it could be that on an annual basis. So I have to come back and get recertified and there's a fee for that recertification. So that would be a recurring fee there or a Ked based, some sort of royalty that's based on the usage. So let's say it's a training. You have licensed your training materials to them.

And maybe, if they're training a thousand people, then their license fee might be different, might be based on the number of heads they're training, versus if they're just using it for their one on one clients, then it might be a different license fee. So the value builder certified, they are a software program and basically it's for professionals who like consultants, like financial advisors, attorneys, accountants, who work with businesses to help them increase the value in their business and for hopefully building it to sell.

And so they have these drivers of value that when you're certified value builder, you can use their system to do these assessments. And then it kicks out a report that tells you how your client's business is doing. And then you work together with the client on creating more value in these drivers.

And so here with value builder, they have a certification fee. That's something you pay up front , and then you go through their process and then you pay an annual or monthly license fee and you get access to their assessment process and their report process. So that would be a pretty standard certification program. So with franchise, we're gonna look at the similarities and differences, but just generally it is a much more intense use of a license.

Again, it's still a license, but instead of just licensing a trademark and some materials, it is the entire business. It's a complete turnkey business. It has operations, it has branding, it has marketing that comes with it, territory specific a lot of times. The fees are of different magnitude. Typically it's an investment really more than just a fee.

And then you would have revenue sharing with it as well. Your franchisor is interested in, you know, they're marketing you, they're providing all the support, so they wanna participate in that upside. So there's that revenue sharing. That could also look like a marketing fee because they do your marketing for you as well.

And they may get clients for you even. So, again, to maintain the quality of that brand, that you have to follow their systems. Every McDonald's is gonna be the same, every Starbucks is gonna be the same. The branding, the supplies, the distribution system everything's the same, right. And so, unlike a certification, that certification is just a contract. It is a license agreement. It is a contract. And so you put in there, whatever it is that you wanna put in there, you know, you negotiate those terms.

A franchise is actually regulated by the states. And so that is why we don't wanna cross the line between a certification, which is a contract relationship and its certification, which is regulated by the states. And unfortunately it's regulated. Literally by each date. So there's not a federal franchise law,

so every state has its own franchise laws. There's kind of four buckets that they go fall into. We're not gonna talk about them, but generally, these are the core elements that will turn a licensing relationship into a franchise. So, you have to have that trademark license, cuz there's that unified brand. The licenseor has significant control over the operations of the business or provides significant assistance over the running of the business, and that there is an upfront fee required, and that there is, and this is revenue sharing.

So these are broad parameters just cuz if you're close to.

Then we wanna take a much closer look. Different states have slightly different interpretations about what significant assistance is. and sometimes it can just be an association with, and so there's different things to look at, but if you have kind of these three things that trademark license, some significant involvement or association among the licensees and licensor,

and something that looks like a revenue share, then we really wanna make sure that we're not accidentally becoming a, a franchise. So H and R block is an example of a franchise. H and R block is a tax prep

franchise, and it is the whole business. H R block requires you to have a brick and mortar location. So you have to sign a lease, you have to use their trade dress, meaning, you know, the fixtures and things that they have, their signage,

and then they have their operations manual. So that would be your franchise. So, what is the difference on kind of a macro level? And again, there's always nuances, but on a macro level, I like to think about it, is it a menu item or is it the entire restaurant?

So if we go to the value builder versus. H&R block. So, the value builder, I'm a lawyer or an accountant or coach or consultant. I have my business, but I wanna add the value builder assessment. I wanna become certified in the value builder assessment process. That is just a menu item. I'm still Erin Austin accounting services,

but I am also certified to do the value builder assessment. So that is a menu item versus the entire restaurant. There cannot be an H&R block inside of Erin Austin accounting. There cannot be a dominoes inside of Andy's pizzeria. Like it has to be the entire business. And so if you look at your program, what you propose to license as being the entire business, or just a menu item, that's a good indicator of whether it's a certification or a franchise.

So they both are license agreements. They both involve licenses, including the trademark similarities.

They both have control over the trademark usage. You never wanna lose control over your trademark, no matter what the usage, whether it's certification program or other, you always wanna control how your trademark is used. There's going to be some kind of balloon payment up front of some sort. In the certification,

it's something that you don't need to get a second mortgage for it's a certification fee or a training fee to get that training. In the franchise, it really is an investment, especially if it's a brick and mortar franchise. The way that the licensor gets paid, it is on a recurring, ongoing basis for use of that license.

But on a certification side, it's a recurring license fee, you know, based on time or, based on recertification. Whereas on the franchise side, it's typically a revenue share, a marketing fee, that kind of thing, where they are participating in the operations of your business and

for the, independently run certification, it is an independently run business. It's a menu item, it is not the business, right? So Erin Austin, accounting, still, I have my own business, I do my own thing, but I also have that value builder assessment that I can offer you. On the franchise side, your operations are dictated by your franchise agreement, your H and R block,

you do things their way. I have my own brand in my accounting firm and I cannot use the value builder trademark in my name. I can't call myself value builder accounting. But I can use that trademark on my site that shows I'm a certified value builder consultant, but it's not my brand name.

It's not my company name. Whereas on the H and R block side on the franchise side, it is the name of the business is H and R block. And the trademark is the business name. And you have that unified brand. You have a license that renews annually. Yes, there is some investment in certification, but it's not, you know, A business make or break number.

And so if you decide that, you know, it's just not for you, you walk away, and you just don't renew, right. Whereas on the franchise side, it is an investment and that fact that it is an investment is the reason that we have special franchise laws that apply, unlike the license, which is just a contract where just regular contract law applies.

So I'll just say briefly that, you know, if you wanna avoid becoming an accidental franchise, some people also call it an unintentional franchise, three things to just kind of be super, super aware of. Do not tie fees directly to the revenue of the licensee.

You, you would be the licenseor and this, all these examples, you're the licenser. Don't permit them to use your trademark in the business name if you have some sort of certified button that they can put on their website, great. But they do not use it in their business name. And then you don't wanna have any type of unifying brand elements,

you cannot provide a massive amount of assistance. Um, but you can do a little bit, if we go to the value builder example, like you can get a newsletter from them. So I'm on the newsletter list of a colleagues who is a certified value builder. And so he sends out an newsletter that basically talks about the value builder podcast, kind of what's happening, the build to sell podcast. And so you have, you know, some marketing materials that you can use, but it's his business, his name, and he has his own consulting business that he does strategy work.

And why does it matter? So it matters because franchises are highly regulated and they're highly regulated because they are the entire business. When we go back to our value builder versus H and R block, if I lose my value builder certification, I still have my accounting firm.

Maybe it makes an impact. Maybe it doesn't, but life goes on. If I have set up an H and R block tax prep business, and I lose that license, my business is gone. I have lost all my investment. And so, so for that reason, it's very highly regulated. And where people get into trouble is where they think they have a certification problem,

they don't follow the franchise law of rules, and those include some significant disclosure requirements. It's almost like a prospectus, like when you're doing a public offering, it's not that bad, but it's it's, but it's similar. And you haven't done those things, then that licensee who really was a franchisee has lots of remedies against you, including your lost profits and loss of their investment and things and penalties and interest.

If things go south. And, you know, it's always about when things go south, so we wanna make sure that we are on the right side of that. So, what is the difference between a usage based license fee and a revenue share? So for the certification with a license fee, so let's say you are a trainer, so you do, I like to use the example of someone who does employee onboarding training, you know, so they do the sexual harassment training for every new cohort of employees that come in.

And so you may do that on a one on one basis, so your license fee will be based on the number of people that are served using your materials. So if you are giving it to an auditorium of a hundred people or a room of 10 people, that license fee is based on the a hundred people or versus the 10 people.

so that is usage based, but it's not related to your revenue. Maybe that a hundred people is, you know, Nonprofit and you only charge them a thousand bucks for it. And maybe the 10 is for fortune 500 C-suite executives and you charge them, you know, $50,000 for it. So that would just be based on the number, the head count, not on what you received for it.

And that would put you on the certification side versus if it is something where it is, you know, 10% of your revenue. So you charge, you know, was it a thousand dollars for the nonprofit and 10%, then they would get a hundred dollars. but for the C-suite, $50,000 fee, they would get, $5,000.

So that would be usage versus revenue. And we don't wanna do revenue share unless you intend to be a franchise.

Do I have to register a certification program with anyone? No, you do not. So unlike franchises, which are highly regulated, certification programs are contract created. And so it is a private transaction between the parties, the same as your services agreement with your clients. Um, your certification agreements, license agreements are private agreements between you and your licensees.

And no, it does not need to be registered. Now, what you will have registered is your trademark of course, would be you'd have a registered trademark and your materials that are eligible for copyright protection. Of course you would register those as well, so that you have a full protection of intellectual property laws.

If I wanna start my own licensing program that incurs some of the IP in the certification program under which I'm licensed, what are my restrictions? If you are using license material, In your current practice and you want to bundle up what you're currently doing and then certify third parties to do what you are doing, that would effectively make your licensees sub licensees of the place that you received your original materials from. Most likely,

that, um, licensor does not permit you to create licensees. So you need to look at that original agreement, to see what you received, what rights you received under them. But I, I mean, I'm almost positive that it says you cannot further create a program and further sub license those rights that you get from them.

That's a really good question because so many of us, um, we use some third party materials to deliver services to our end clients, and that's a hundred percent fine. That's exactly why we license them to provide services to our end clients. But we can't then use those same materials, unless it explicitly says that we can, to create sub licensees with those materials.

All right, ladies. Thank you so much for joining me today. I have mentioned, uh, licensing in other presentations, so you can find them on my LinkedIn.

and I think you can find 'em on my YouTube page, and so contact me if you can't find them. And I also have a handout, that kind of has this different intensities of licensing from that basic license to the certification, to the franchise.

And so anyone who wants that, um, make sure you reach out and we can get that to you too. Thank you so much and have a great day.