Trademark Licensing Activity
Technology licensing typically dominates our collection efforts at IPSCIO/RoyaltySource. Trademark licensing is active, but typically only in areas of consumer-facing goods such as food, beverage, restaurant, retail store and apparel. We see very little trademark licensing activity focused on business-facing goods and services as well as other consumer-facing services.
To expand the availability of market-based trademark royalty rates to use in a trademark valuation or license negotiation, we collect franchise agreements. Why are franchise agreements useful? They are useful because included in the bundle of intangible property licensed in a franchise agreement is the right to use a trademark. In other words, a franchisor licenses a trademark with a bundle of other intangible property such as know-how, procedures, business model and rights to sell its branded products and services to a franchisee. In return, the franchisee pays fees that typically include a royalty payment measured as a percent of sales.
Since there are few “pure” trademark transactions available in the business segments listed below, franchise royalty rates in these segments can be used as a guide to develop a trademark royalty rate.
Broad Use of Franchise Agreements
Using a franchise royalty rate as a market-based indication of a trademark royalty rate requires judgment. The first step is to carefully examine the franchise terms in order to clearly understand what rights are being granted to the franchisee. It is also important to understand the nature of the franchisee’s business as an aid to judging what are the most important needs of the franchisee that are being satisfied by the deal. We must remember that it is the responsibility of the trademark owner to ensure that the products or services rendered by a franchisee (licensee) maintain the quality standards that customers have come to expect. Hence there are almost always additional elements such as recipes, know-how or procedures in the franchise “package.”
Lacking specific data that can help identify the trademark portion of the franchise royalty rate, we can simply view that rate as a ceiling or a maximum a licensor could charge for the use of a trademark. It is also helpful to simply split the rate 50–50. These two suggestions, while not perfect, do supply boundaries to consider and offer a check on the reasonableness of selection of a rate by using another method.
Only One Market-Based Transaction
We have reviewed the franchise agreements and trademark licenses included in the IPSCIO/RoyaltySource database for indications of a split between trademark and other intangible property. We found one market-based example.
Detailed in the February 22, 2000 Krispy Kreme Doughnuts, Inc. Form S-1 Registration Statement, we discovered that Krispy Kreme in-licensed the U.S. and Foreign registered and unregistered Krispy Kreme trademark family and built a franchise business.
A Little History
Krispy Kreme is a specialty retailer of doughnuts made fresh in stores. The first store opened in 1937. As of October 31, 1999, there were 141 Krispy Kreme stores in the United States consisting of 59 company-owned and 82 franchised stores. By early 2016, there were 116 company-owned stores and 1,005 franchised stores worldwide. On July 27, 2016, Krispy Kreme merged with Cotton Parent, Inc. and its securities registration was terminated, limiting further public information disclosure.
Krispy Kreme was granted worldwide rights to franchise and sublicense the trademarks to franchisees and sublicensees with a license agreement dated May 27, 1996. The grant also includes a non-exclusive, non-assignable right and license to use the trademarks in Krispy Kreme’s corporate name and in connection with the licensed products. Products include all services, fresh and frozen doughnuts, fried pies, honeybuns, bagels, muffins, sweet rolls, all products sold at Krispy Kreme retail locations and other products as agreed. The license agreement remains in force and effect for a period of one year and renews automatically for successive annual terms unless canceled by contract terms.
Throughout the period 1997 to 2015, the Krispy Kreme franchise royalty rate and trademark royalty rate did not change. As of July 2019, the franchise rate remains the same.
It is simple. The franchise royalty rate is 4.5% of sales. The trademark royalty rate is 2% of sales. In this case, 44% of the franchise royalty rate relates to trademark. This percentage and the broad use parameters offer insights into trademark royalty rates in areas where there are limited market-based transactions to observe.