Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Intellectual Property Licensing for Passive Income
Transcript
- Lucas: You know the phrase 'working on your business, not in it' — most franchisees interpret that as hiring managers or building systems. But there's a whole other layer that very few franchisees tap into. Luna: Let me guess — you're talking about licensing the knowledge you build as a franchisee? Lucas: Exactly. I'm talking about intellectual property licensing. Not the franchisor's IP — your own. The proprietary methods, training materials, or even software tools you develop while running your franchise. If you own the copyright or trade secret, you can license it to other franchisees, maybe even outside the system. Luna: That feels like dangerous territory. Most franchise agreements say the franchisor owns any improvements or innovations you create. Lucas: That's the critical nuance. Many standard franchise agreements do have a 'grant-back' clause — you invent something, the franchisor gets a license or ownership. But those clauses are negotiable, and they don't always cover everything. The key is to carve out IP that's separate from the franchisor's system. Luna: So what's a real example where a franchisee pulled this off successfully? Lucas: I spoke with a multi-unit QSR franchisee in Ohio who runs eight locations. Over five years, he developed a training onboarding system for new crew members — video-based, with quizzes and gamification. It cut his training time by forty percent. His franchisor's official training took three weeks; his took ten days. Luna: And the franchisor didn't claim it? Lucas: He was careful. The materials used no franchisor trademarks, no proprietary recipes, no store manuals. He filmed his own employees, wrote his own scripts. The franchisor's legal team reviewed it and agreed it was his IP. So he started licensing it to other franchisees in the same brand — twenty-five of them now pay him a monthly fee. He makes about two hundred grand a year from that alone. Luna: That's impressive. But what exactly are they licensing? Is it a trade secret or a copyright? Lucas: Both, actually. The training videos and written materials are copyrighted. The methodology — the sequence of modules, the assessment triggers — he treats as a trade secret. Licensees sign an NDA. So he's got two layers of protection. And he structured the license as a flat monthly fee per location, not a percentage of sales, so it's simple to administer. Luna: That avoids the franchisor's royalty reporting system too. Smart. Lucas: Right. The franchisor doesn't touch it. It's a private contract between franchisees. But here's the catch — he had to get written acknowledgment from the franchisor that his IP was outside the system. Without that, you risk a dispute down the line. Luna: What types of IP are most licensable for franchisees? Not everyone has a training system. Lucas: There's a spectrum. At the simple end: a scheduling template that optimizes labor based on your store's foot traffic patterns. That's a trade secret. You could license it to other franchisees in your network. Or a customer retention playbook — a set of scripts and email templates you've refined. That's copyrightable. Luna: What about software? I know some franchisees build custom apps for inventory or ordering. Lucas: That's the high end. I know a franchisee in the home-services space who built a proprietary dispatch algorithm that routes technicians based on traffic and job complexity. He holds the copyright on the code. He now licenses it to seven other franchisees in the same brand. That's over six figures annually. But you need to be sure the code doesn't incorporate any franchisor APIs or data. Luna: That makes me wonder — what's the legal framework? Do franchisees need an IP attorney to draft these agreements? Lucas: Absolutely. You need a license agreement that specifies scope, territory, term, fees, and most importantly, indemnification. If your IP causes the licensee to violate their franchise agreement, you want to be protected. And you need to check your own franchise agreement for any non-compete or non-solicitation clauses that might restrict who you can license to. Luna: And if the franchisor finds out you're licensing to other franchisees, could they try to claim it's a breach? Lucas: They could, which is why you want that written acknowledgment upfront. Most franchisors will allow it if it's clearly separate and doesn't dilute their brand. In fact, some franchisors like it — it makes their franchisees more successful. But you need to navigate it carefully. I'd recommend getting the franchisor's sign-off in writing before you start licensing. Luna: Let's talk numbers. What's a fair price for a license like that? Lucas: It depends on the value. For a training system that saves two weeks of onboarding, a hundred to two hundred dollars per month per location is common. For a software tool that directly increases revenue, you might charge a percentage of the benefit, say ten to twenty percent of the cost savings or revenue lift. The Ohio franchisee I mentioned charges a flat hundred and fifty per location per month. Luna: So if you have twenty licensees, that's thirty-six thousand a year. Not huge, but it's passive. Lucas: And it scales. If you have a hundred licensees, it's one hundred and eighty thousand. And you're not doing much additional work. The IP is already developed. The marginal cost of adding a licensee is almost zero. Luna: What about the risk that a licensee reverse-engineers your system and stops paying? Lucas: That's where the trade secret protection matters. You don't disclose the full methodology without an NDA. And you build in audits — you can require licensees to let you verify they're still using your system. But honestly, most franchisees are collaborative, not predatory. The bigger risk is over-valuing your IP and not getting any takers. Luna: What's the most common mistake franchisees make when trying to license their IP? Lucas: Thinking their operational tweaks are proprietary when they're actually standard industry practice. I've seen franchisees try to license things like 'how to greet a customer' — that's not protectable. You need real novelty or a documented efficiency gain. The best IP comes from solving a problem that the franchisor's system doesn't address. Luna: So it's about identifying a gap in the franchisor's offering and filling it in a way that's unique to you. Lucas: Exactly. And then documenting everything — the development process, the results, the testimonials. That builds your case that it's valuable and yours. I'd say the window for this kind of thing is widening. More franchisees are becoming sophisticated operators, and franchisors are getting more comfortable with franchisee innovation. Luna: If a listener wants to explore this, what's the first step? Lucas: First, audit your own operations. Write down every system, template, or process you've created that isn't in the franchisor's manual. Second, check your franchise agreement for any ip related clauses. Third, talk to a franchise attorney about whether that IP is actually protectable. And fourth, if you think you have something, approach your franchisor's legal team proactively — show them how it could benefit the whole system. Luna: That's a really practical roadmap. And it's a way to turn your franchise into something that pays you even when you're not working. Lucas: And we're all for that. And you know, we've been having these conversations now for over a hundred episodes — all ad-free, because we think the content should stand on its own. If these episodes have helped you in your business, you can support the show at buy me a coffee dot com slash fexingo. No pressure, just a way to keep it going. Luna: Yeah, it's a small way for listeners to give back if they've gotten value. We appreciate everyone who does. Lucas: Back to the Ohio franchisee — he's now working on a second IP: a scheduling optimization algorithm. He's planning to license it to other franchisees in his brand, and maybe even outside the brand if his franchisor agrees. That's the goal — build a portfolio of IP assets. Luna: So this isn't a one-off. It's a strategy. Lucas: Exactly. Think of it as R&D for your franchise. Every year, set aside time to develop one new piece of IP. Over time, you build a library. And that library becomes a second business — one that doesn't depend on you being in the store. Luna: And if you ever sell your franchise units, you can keep the IP and keep earning from it — that's a huge advantage. Lucas: That's the endgame. You sell the physical stores but retain the IP licensing income. That's true passive income. And it's something almost any franchisee can start working toward, no matter what brand they're in.