How to buy a franchise
So, the franchise. We think that many people know what is behind this concept. In short, franchising, franchising is a business model in which the franchisor (business owner, trademark owner) provides the franchisee (user) with the right to use the set of exclusive rights objects belonging to him, including the trademark.
In other words, the franchisee gains the opportunity to use someone else's successful business scheme for a fee. In principle, all other things being equal, a similar model of doing business is mutually beneficial for both the franchisor and the franchisee.
The franchisor’s benefit is obvious - due to independent investors, he expands his business, increases his brand recognition, receives an additional increase in cash flows.
For a franchisee, this scheme is very attractive for several reasons. Firstly, he buys a working successful solution, and secondly, there is a significant saving on brand promotion and finding loyal customers.
Ideally, this is so.
Practice shows that the wrong choice of a franchise, a frivolous approach to formalizing relations with the franchisor, can provoke a deplorable outcome for the franchisee as a weaker side in these relations.
Before starting your franchise business, you should ask yourself a simple question: am I ready to open a franchise business? Is it interesting to me? Do I want to be controlled by someone? There may be many questions, here we have given the main ones that will help to understand our own real intentions.
In order not to get burned, it should be clearly understood that franchising is, firstly, not always guaranteed success, and secondly, is a business model in which an entrepreneur is very limited in his own independence.
In this case, the freedom of the franchisee will be limited due to control and pressure from the franchisor. This will be manifested in the need for strict compliance with various mandatory requirements established by the franchisor for the premises, its design, product line, suppliers, product quality, customer service, etc. It is because of the numerous mandatory requirements that the franchising model is not suitable for everyone.
About choosing a franchise.
A franchise should choose based on its own interests, goals, principles and preferences. The taste and color, as they say. The only thing to keep in mind is that franchises in different business areas have their own nuances.
So, often, when selling clothes under a franchise, it is enough to pay only a lump-sum payment (initial fee to the franchisor or the cost of entry), without subsequent payment of royalties (regular payments to the franchisor for the right to use the complex of exclusive rights objects).
At first glance, the circuit looks very attractive.
True, do not flatter yourself too much: with this approach, the amount of the lump-sum contribution is significantly higher than the size of the lump-sum contribution in the royalty payment scheme. Usually in such cases, franchisors compensate for the lack of royalties by the duty of the franchisee to purchase goods either from themselves or from the persons indicated by them.
In this case, the margin on the product for the franchisee will be higher than the average royalty rate (about 8%). And of course, a lump-sum payment of a lump-sum payment without paying regular royalties to the franchisor leads to the fact that after the sale of the franchise, the franchisor loses interest in your business.
Therefore, you can not hope to receive further support, advice and support from the franchisor.
About the rules of hygiene.
Before directly “buying a franchise”, it’s worth remembering such basic hygiene rules as collecting information about the franchisor, its products, registered trademark, financial indicators of its activity, average payback period of a business opened by its franchise, franchise term, and, of course, franchise cost (lump-sum payment and royalties).
All this information can be obtained from the franchisor, but it is better not to be limited to only one source of information. It will not hurt to independently make inquiries on the Internet, read customer comments, contact other franchisees (their contacts can be requested from the franchisor or find his company's website), evaluate and analyze their reviews, compare them with the information received from the franchisor, look at the financial statements, litigation.
A popular “trick” among franchisors is the provision of various business plans, opening plans, etc. to potential franchisees. We do not recommend choosing a franchise based on data from business plans, because they almost always have a guarantee of success and high franchise rates. It is better to rely on information received from franchisees already working on this franchise, or on the results of their own planning and forecasting.
Further, I would like to focus on several, although formal, but important points, namely, on the design of relations between the parties when “buying a franchise”.
It should immediately be determined that in Russian law the term “franchise”, “franchising agreement” is not legally fixed. Similar relations with us are regulated by the norms of Chapter 54 of the Civil Code of the Russian Federation, which is devoted to a contract of commercial concession. The commercial concession in Russia and franchising abroad, although very similar mechanisms, are not identical.
So, those who are at the stage of formalizing relations with the franchisor should remember Chapter 54 of the Civil Code of the Russian Federation.
This will allow you to distinguish between original franchise packages and pseudo-franchises.
Pseudo-franchises include those franchise offers within the framework of which the relations of the parties are executed, for example, with a license agreement and a supply agreement concluded on its basis, a simple partnership agreement, paid services, and any other than a commercial concession agreement. Most often, the reluctance to conclude a commercial concession agreement is explained by its complexity (a rather voluminous multi-page document is obtained), as well as the need to register the agreement with Rospatent.
However, it is in the interests of the franchisee to conclude with the franchisor precisely the contract of commercial concession, and not any other. First of all, it is necessary to ensure the protection of the rights of the franchisee as a weaker party in the relationship. Any franchisee is interested in the franchisor providing his organizational and technical support, consulting, support not only on paper, but also in reality.
This can only be achieved by concluding a contract of commercial concession, since it is this particular contractual design that includes transferring technical, commercial documentation, other useful information to the mandatory duties of the franchisor, as well as instructing the user (franchisee) and his employees. Even if you have not clearly stated such obligations of the franchisor in the contract, you will be saved by the presence of relevant peremptory norms in the law.
On the essential terms of the contract of commercial concession.
It is necessary to clearly verify that the subject of the agreement includes the provision of the right to use the trademark with the registration number and priority date, otherwise the agreement will be considered non-concluded, Rospatent will refuse to register it.
Under the guise of a commercial concession agreement, it is sometimes proposed to conclude an “agreement on the granting of rights”, according to which the franchisee is granted the right to use the technology developed by the franchisor, commercial designation, know-how and other objects except the trademark.
Such an agreement will not constitute a commercial concession agreement in the form in which it is defined in the Civil Code of the Russian Federation. Subsequently, if the franchisor violates the terms of such an agreement, it will be difficult for the franchisee to receive all regular payments paid under the agreement. One of the options for a refund is an attempt to qualify such an agreement as a commercial concession agreement, based on the general intentions of the parties. Further, recognize the contract as void, namely void (due to non-compliance with Clause 2 of Article 1028 of the Civil Code of the Russian Federation - the condition for registering the contract with Rospatent) and declare requirements for the application of the consequences of the void transaction. True, the court does not always share this position.
So in one case, the court denied the user to recognize the contract of commercial concession invalid due to the fact that paragraph 2 of Art. 1028 of the Civil Code of the Russian Federation is distributed and is applicable only to a contract of commercial concession. Due to the fact that the disputed agreement was not such, regardless of its legal nature, it cannot be declared null and void due to the lack of registration with Rospatent (FAS Resolution of the Far Eastern District of November 30, 2012 in case A51-4947 / 2012).
When granting the right to use a trademark under a commercial concession agreement, attention should be paid to the classes in relation to which the trademark is registered. It is necessary to check whether they correspond to the types of services for which the franchise is supposed to be used. If they do not comply, then the concluded agreement will not be qualified as a commercial concession agreement.
On limiting the rights of the parties.
Important terms of the contract of commercial concession, to which special attention should be paid and for the violation of which serious measures of contractual liability are usually provided, are the conditions on the restriction of rights.
We mean the so-called non-competition conditions. The contract may stipulate the obligation of the franchisee not to compete with the franchisor in a certain territory and not to allow similar things on the part of affiliates. Some contracts provide for a violation of the specified condition for a penalty of half the lump-sum payment, so that in the interests of the franchisee, either do not violate the condition or lobby for a smaller penalty in the contract. The franchisee must ensure that the contract contains a corresponding obligation of the franchisor not to grant rights to the contract to third parties in the territory assigned to the franchisee.
About the franchise term.
A key feature of the franchise and the terms of the contract is the term of the franchise. Just note that the longer the term, the more attractive and profitable the franchise package for franchisees. Obviously, franchisees should not even be considered franchisees by definition for franchise offers. Most franchises have a term of five years. Given the payback period, the amount of initial franchisee investments, a franchise for a period of 10 years or more is a more profitable option.
Grounds for terminating the use of the franchise.
It is advisable to provide in the contract the conditions for the unilateral termination of the use of the franchise (termination of the contract). The formulation of suitable grounds or circumstances, the existence of which will allow to neutralize the negative consequences of the activity, will only benefit both parties to the contract.
Conclusion
In conclusion, I would like to once again note that when starting a franchise business, one should be guided not only by the franchise indicators promised in the business plans and guarantees of its success, but also by their experience, forecasts, and feedback from existing participants in the system. The correct and duly developed documentation of the parties ’franchise relations in the future will minimize the risks of the franchisee and in many ways guarantee the success of the franchise.
Elizabeth Razina
Lawyer. I am engaged in litigation, intellectual property. I am writing articles, looking for interesting information and suggest ways of its practical use. I believe that thanks to high-quality legal analytics, clients come to a law firm, and not vice versa. Do you agree? Then let's be friends on Facebook.
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