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This section provides IP information for those purchasing an existing business or looking to buy into a franchise. #64 Buying A Business When you buy a business you buy more than the stock or the right to sell products out of an existing shop. You are generally buying the IP and other intangible assets of the firm. Valuing Ip There are many ways to value IP, and given the complexity of valuation, someone with accounting and IP expertise will be required. Make sure your accountant, business adviser or lawyer has experience in the valuation and management of IP. Franchising & Ip Businesses such as McDonald’s, Dymocks bookshops
and Eagle Boys Pizza
have made the word “franchise” a household term. Simply,
when a
successful business wants to expand its operation without borrowing Buying A Business Rather than start a business from scratch, many people buy a business that's already established. When you buy a business you buy more than the stock or the right to sell products out of an existing shop. You are generally buying the IP and other intangible assets of the business. Whether it's their logo, patents or client list, you are buying their intellectual property and the rights to use it. And just as you'd need to value the stock, fixtures and fittings, work in progress, current contracts and any hire purchase or lease agreements, you need to value the IP and other intangible assets that you are buying. The following IP and other intangible assets might
be identifiable in
a business: In simple accounting terms, identifiable intangible assets such as trade marks, patents or licences will be recorded at their fair values on the acquisition date of a business. In some cases, amortisation, (which is like depreciation) can apply to IP assets. This implies that their overall value can fall each year, just as the value of office assets (like computer equipment) does. On the other hand, successful sales of products and services may mean that the value of IP such as patents and trade marks increases. For further information and resources on buying an
established business, please visit business.gov.au. Valuing IP There are many ways to value IP, and given the complexity of valuation, someone with accounting and IP expertise will be required. Make sure your accountant, business adviser or lawyer has experience in the valuation and management of IP. IP rights must, of course, be in force and valid, and it may be appropriate to seek warranties in this regard. Patent attorneys and lawyers can advise on validity of registered IP rights. Be clear on IP for tax purposes Be aware that tax and IP have two points of contact: 1. Tax applies to any gains made from commercialising your IP, such as sales, franchising and/or licensing your IP to others. It could also apply if you sold your patent or trade mark and its value, like a house, has increased in value. 2. There are transaction taxes such
as stamp duty, GST and withholding tax
that could apply. Given this
potentially costly issue, it would be
wise to seek accounting advice on the
structure you would use to run the
business you intended to buy. This is
an important decision considering
the IP assets that are part of the sale. Tax treatment for different IP The taxation of the different types of IP is complex, so speak to your accountant about how your developed and acquired IP should be treated, and how your IP could be leveraged to deliver taxation benefits, e.g. through transfer pricing. However in general terms, pursuant to the general tax deduction provisions of the Income Tax Assessment Act 1997, losses and outgoings incurred to create and/or own IP rights, or for the use or enjoyment of existing IP rights may attract a tax deduction. A deduction is claimable only to the extent that the losses or outgoings are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing this income. Importantly losses or outgoings of capital, or of a capital nature are not deductible. This means that for most small businesses, the expenditure to purchase IP or outgoings incurred in the creation of IP will generally be regarded as capital outgoings, whereas periodic expenses, incurred for example in obtaining a licence to use third party IP, or to take IP infringement action against another, will be deductible in the year in which the expense was incurred. Similarly, the costs to register a trade mark, patent or design are of a capital nature as registration provides the IP owner with an enduring benefit, whereas expenses to maintain an existing IP registration to ensure its continued existence would be deductible. How do you check who owns the IP before you buy it? It's vital to check the ownership of the IP you are buying. For example, when buying a business and its associated trade mark, it is wise to search IP Australia's trade mark register to see who owns the trade mark. But that's not all - as a third party could have an interest in the asset or there could be a loan held over the trade mark. It is recommended that you seek expert advice - a lawyer, or a patent or trade mark attorney can help you. Franchising IP Businesses such as McDonald's, Dymocks bookshops and
Eagle Boys Pizza have made the word 'franchise' a household term. According
to an
article in the 'Business Review Weekly magazine' of 20 January to 16
February 2005, the franchise industry is booming with over 150 new
franchise chains appearing in Australia in 2003 and 2004: there are
now over 50,000 franchisees in Australia. With such astronomical
growth in the industry and a touted 90% success rate for established
franchise systems, it's little wonder that when you are thinking IP and the franchisee (the buyer of the IP in the business) When a successful business wants to expand its operation
without borrowing capital to develop, one possible option is to license
their
IP to franchisees. In addition to the actual product or service of
the franchisor, franchise IP generally includes trade marks, logos,
promotional material, a business system, marketing system, various Franchisees usually also benefit from coordinated marketing efforts managed by the franchisor. Putting it another way, franchising is really a method of systematically sharing the franchisor's IP to distribute goods or services. The franchisor owns the IP rights over the various elements of the franchise and the franchisee pays a fee or regular royalties to use the franchisor's IP. A Holden car franchise is an exclusive branded distributorship business, and the food and sandwich outlet known as Subway is a business format franchise. A major benefit of the franchise system is that you
as the franchisee are able to trade under a well-known trade mark.
In fact, one or more
trade marks will usually be at the core of most franchises. The
franchisee typically is granted a trade mark license, where the fee
is a percentage of the gross turnover. There is usually also a fee The federal government has made buying a franchise a less daunting experience thanks to the introduction of the Franchising Code of Conduct, which sets out the rights of the franchisee more clearly. Also, the Australian Competition and Consumer Commission (ACCC) is watching franchisors who behave badly. The ACCC has a free Franchisee’s Guide available on their website - see www.accc.gov.au to get a copy. A significant point to remember is that you should check the intellectual property clause of the franchising agreement and/or disclosure document thoroughly before you sign anything. Ideally, you should have your legal or business adviser look over the agreement to ensure you understand your broader obligations and those relating directly to the intellectual property you are licensing as part of the franchising agreement. IP rights and the franchisor (the seller of the IP in the business) For franchisors there are specific IP issues that come into play when considering turning your business into a franchise system. Your most powerful tools in becoming a successful franchise are your trade marks and your unique business operation. It is strongly advised that you protect trade marks and unique business methods as forms of registered IP. This is not only effective business insurance for you as a franchisor, but will also provide potential franchisees with confidence that the intellectual property they are licensing from you is secure and can be used to restrict competitors’ entry into the market. You may also wish to explore the option of exporting
your franchise system overseas. In this case the protection of your
trade marks
overseas will be critical to your success, and you should investigate
the costs and processes involved in overseas registration. Speak with
your legal adviser or trade mark attorney and see Some other options available to you include the use of unregisterable IP rights such as copyright, and the use of confidentiality agreements. A registrable IP right will not always protect the business know - how connected to your franchise licence. While many of the processes and operations of a franchise may end up in the public domain (e.g. everyone will be able to see the fit-out) there could be some confidentiality obligation placed on franchisees, particularly where there is valuable operational know-how or confidential information such as secret recipes. When you enter into a franchising agreement, generally the franchisee secures the rights to operate the business or use the IP for a set period. You as the franchisor, in turn, train and support the franchisee and market the business. Usually there is an ongoing levy or fee and an advertising fee for this activity. Where to get help • The Franchise Council of Australia sells
various publications for franchisors
and franchisees and provides • The Australian Competition and Consumer Commission at www.accc.gov.au • The Franchising Centre has published a book called Franchising in Australia. The Franchise Centre provides advice on the pros and cons of franchising and writes comprehensive reports on any franchise system that you want to check out. www.franchisecentre.com.au Also seek help from: • Your accountant |
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