Franchising

Features A franchise is an agreement or arrangement to conduct a particular business in accordance with an established format, brand, technique, or model. In return, the franchisee usually pays a fee and a percentage of the sales revenue to the franchisor. Examples of franchises include MacDonalds,  Prontoprint, Dynorod and Coffee Republic. In a franchise agreement, the franchisor permits the franchisee to use its name in return for payments. The franchisor places restrictions on and exercises a measure of control over how franchisee operates the business.  It will provide the franchisee with initial and continuing assistance. The franchisor may exercise continuing control over the franchisee in some cases. The franchisee operates his business under the franchisor’s trade name, so that it appears to the outside world, to be the franchisor. The franchisor sells his products and services to the franchisee. The franchisee trades under the franchisor’s trademarks and trade names and benefits from the franchisor’s help and support.… Read the rest

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Key Commercial Issues The franchise agreement is largely a matter of contract law. The core of the agreement is the grant to the franchisee of an exclusive or non-exclusive license to operate the franchise business, together with  ancillary intellectual property rights, know-how, and assistance. There may be a separate trademark license. The franchisor may agree to give the franchisee exclusivity within the territory or not.  Generally, an initial fee is payable. The terms of the initial fee are subject to negotiation. It may be substantial in some cases. The term/ period of the agreement will be specified. They may be an option or right to extend or renew the franchise at the end of the term.   Otherwise, a renewal must be agreed. Conditions may apply to renewal such as undertaking refresher courses or paying further fees and cost. Terms of between 5 to 10 years are common.  The first agreements in a new territory may have a much longer duration, perhaps for up to 25 years.… Read the rest

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Marketing The franchisor may establish a marketing fund and require all franchisees and sub-franchisees to contribute. The franchisee may pay an advertising levy in conjunction with other fees and charges.  The fund is for the purpose of advertising, marketing and promotional programmes. The franchisor may operate the fund. The head franchisor may delegate the operation of the fund or a local element of the fund to a master franchisee/ sub-franchisor. Marketing and promotional fees may be a percentage of gross sales.  This is in addition to local advertising expenditure.  The franchisee may undertake obligations in terms of minimum expenditure on marketing promotion and advertising. Variations in the amount spent may require consent. The franchisor may require that it approves all advertising. Advertising and marketing materials \are usually be made available to the franchisee and sub-franchisees. Provisions may deal with the adaptation of the materials to the local market. Franchisor’s Methods The franchisee is usually obliged to remain faithful to the franchisor’s mode of operation and methods.… Read the rest

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Transfer I The franchisor will usually retain the right to transfer the benefit of the agreement so that it is available for its assignees. The franchisee’s  rights are unlikely to be freely transferable. It may have acknowledged that the franchisor has relied on the personnel, character, financial and business ability, etc. of the franchisee. An assignment may arise voluntarily or involuntarily. It may include a sale or assignment, the grant of a mortgage, merger, consolidation, and the reconstruction of a corporate franchisee. Delegation and the outsourcing of operations are potentially transfers. Where a transfer is permissible or unavoidable, the franchisor is likely to require at a minimum, to be satisfied in relation to the character and capacity of the proposed transferee. Transfer II The franchisee may require the consent of the franchisor to sell or transfer the business or any interest in the business. It may be that the consent is not to be unreasonably withheld.… Read the rest

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Franchise Development Direct franchising may be difficult in practice. The necessary backup and assistance may not be easy to provide where the franchisee is in another country. There may be difficulties of monitoring. The franchisors may seek to establish a presence or directly or by way of a joint venture within the third country. As an alternative to a direct presence or joint venture, the franchisor it may grant a master franchise agreement or a master development agreement that obliges the developer to develop of the franchise either by itself or through others.  There will be a corresponding loss of control at the level of the master franchisor for a greater level of control between the master franchisee and the sub-franchisee. The franchisor may grant a master franchise agreement. The master franchisor is given the right to operate and grant franchises within the territory. It undertakes to appoint franchisees on the basis of the form of franchise agreements stated out in the agreement.  … Read the rest

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Franchise Agreements Franchise agreements are vertical agreements under Irish and EU competition law. They are potentially compatible with competition law.  They may benefit from the block exemptions for vertical agreements. They may be justified on competition law first principles, broadly on the basis that their benefits may exceed the adverse effects on competition. Horizontal agreements are agreements between participants at the same level in the market. Vertical agreements are those between participants at different levels in the market. Vertical agreements containing restrictions  are much less likely to offend competition law, than horizontal agreements which contain restrictions. Vertical agreements may adveresely affect competition by reason of restraints imposed by the use of market power.  The EU 2010 Vertical Agreements Block Exemption Regulation expires in 2022. It takes a similar approach to previous regulations.  Agreements entered prior to 31st May 2010 may benefit from the earlier 1999 regulation.  The exemptions are based on the trade-off between the assumed benefits in terms of network viability, quality, and investment and the anti-competitive effect.… Read the rest

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