There has actually been a lot of ink spilled recently about the plight of the small entrepreneur in the recession. In particular, there has actually been a good deal of discussion as to whether franchising as a company design has actually done fairly much better or reasonably worse than non-franchised organisations.


There is no conclusive answer. If the response is that franchises have done reasonably even worse why might that be the case? There are myriad responses from excess liquidity in the capital markets to the simple fact that franchising did so well over the past 20 years that it was just natural that it would experience a momentary set-back.


Another possible factor, and the topic of this essay, may be that by its very nature franchising has a higher inherent danger profile due to the fact that franchising necessarily entails the transmission and transference of trade secrets and confidential. As a result, the more popular a franchise becomes the harder it is to keep its trade secrets and secret information.


This, in turn, affects the long term economic health of the franchise. A franchisor for that reason makes a bet that it can parlay its franchise system into a lucrative venture without losing the value it already has staked in its trade secrets.


So to the degree that the development of a franchise system affects the capability of the franchisor to thoroughly monitor its trade secrets, the financial health of the franchise will be impacted. The growth of franchising has not been driven by countless distinctively derived and/or recently invented products. The growth of franchising, and the ensuing fragmentation of lots of markets within franchising, is a direct outcome of previous trade secrets and secret information being distributed in the market place.


Unlike patents, which carry a protectable interest of Twenty Years, trade secrets are protectable for an indefinite period of time. Reasonably speaking, however, trade secrets do not typically supply indefinite worth to the franchisor. The more popular the franchise ends up being the most likely it is that someone in the future will either get trade secret info or will reverse engineer the trade secret. Thus the problem acquires in the ability of the franchisor to protect the trade secret enough time such that the franchise itself has sufficient brand commitment to compensate for any dissemination of info that may have previously been classified as trade secrets.


Much, if not all, of the worth in a franchise is included in the distinct way where the franchise is sold and the special nature of the product itself i.e., its trade secrets. The ability of the franchisor to sell franchise units is a direct function of a potential franchisees belief that the franchisor has created a product and a product distribution system that can not be easily replicable. The worth of the franchise is necessarily derivative of how quickly a non-franchisee (or ex-franchisee) can duplicate the franchisors’ offering. A franchisors “gold” depends on its trade secrets. A franchisor obtains value from its franchise system due to the fact that its unique system is not generally understood by the public. Therefore a franchisor needs to be diligent in preventing the special ways and approaches it has of performing company from being readily known by the public.


Exactly what is a trade secret exactly? The Uniform Trade Secrets Act which has been embraced in some type or fashion by more than 40 states- specifies trade secrets as


Details, consisting of a formula, pattern, compilation, program, gadget, method, strategy or process that: i) derives independent financial worth, real or possible, from not being usually understood to, and not being easily ascertainable by correct methods by, other persons who can obtain financial value from its disclosure or usage, and ii) is the topic of efforts that are reasonable under the scenarios to maintain its secrecy.

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