The times when the appearance of a franchise on the market was a rare occurrence, and when entrepreneurs created franchise offers acted more at random, or took the experience of Western companies as a basis, are long gone.
Today, new franchises open every month. And the situation is such that it is easier for beginners to choose a franchise for themselves than to start a business from scratch. This is confirmed by statistics - only three out of ten new businesses remain afloat a year later. But among franchisees this figure reaches eight.
But despite its popularity, franchising remains a complex niche that requires at least a little understanding of how it operates. Both to create a franchise and to buy a franchise.
What should an ordinary entrepreneur do who wants to purchase a franchise and has decided to worry about what to pay attention to when purchasing? To his question “where to look?” We answer - here. Because below we will give a summary and specifics of the franchise agreement.
Buying and selling a franchise means, firstly, concluding a cooperation agreement. In this case, a franchise agreement
Franchising agreement is a commonly used term. You can also find a “commercial concession agreement” and a “franchise agreement”.
This is an agreement that determines the transfer of rights to use one or another intellectual property of the franchise owner by its buyer.
Such an agreement specifies all the terms of interaction between the franchisor and franchisee.
In Russian franchising practice, two main types of agreement are used. A license agreement that is used as a means of disposing of an exclusive right.
As well as a commercial concession agreement, which is also called a franchise agreement and is used in most franchising offers.
Why do you need a franchise agreement?
Many people view franchising as a complex of business processes. That's all. Forgetting that the relationship between the franchisor and the franchisee also operates in the legal field. Moreover, situations when this legal field becomes more relevant than the entrepreneurial field are very frequent. We are talking about emerging disagreements between participants in franchising relationships. And the franchise agreement in this case acts as the main “field” where events first develop. Because if compiled correctly, it will avoid wasting time, resources and effort.
The franchise agreement is intended to legitimize the relationship, but it also regulates everything that happens in the future between the franchisee and the franchisor. And if one of the parties fails (intentionally or poorly) with its responsibilities, then the agreement regulates this point, and no one has any questions about further actions. Everyone is happy, everyone is happy (not).
Moreover, since both parties have rights and obligations, the agreement is important for both the seller of the franchise and its buyer. For several reasons:
- A dissatisfied franchisee may apply to the court for the return of all funds paid by him as remuneration to the franchisor. An agreement that has clearly defined rights, obligations, as well as rules for resolving disputes can help ensure that the matter is resolved quickly and without unnecessary bloodshed.
- Often, a new franchisee expects that immediately after paying the lump sum fee he will receive a ready-made, successful, operating business with maximum profit. It is clear that there is a task to explain the principles of building a business for a specific franchise at the negotiation stage. However, a written agreement can at least protect against those who still won’t understand it.
- There are scammers everywhere. Including among franchise buyers.
The difference between a concession agreement and a license agreement
There is no concept of franchising in the legislation of the Russian Federation. According to the law, the transfer of intellectual property rights can be carried out under a commercial concession or licensing .
However, they have significant differences :
- Purpose of the agreement . The granting of rights under a license agreement does not imply a specific area of its use, although it may be stipulated by the terms of the agreement. A commercial concession involves the use of acquired rights only in business activities.
- Subject of the agreement . The licensee is granted the right to a specific object of the license (intellectual property), and a commercial concession provides for the transfer of a whole range of such rights, including, without fail, the right to a trademark.
- Parties to the transaction . Both citizens and legal entities can act as a licensor or licensee. A commercial concession assumes exclusively the participation of commercial organizations and individuals registered as entrepreneurs.
- Responsibility of the parties . The franchisee has a higher level of responsibility than the licensor.
- The nature of the movement of material goods . The conclusion of a concession agreement always presupposes the receipt of profit by the copyright holder, while the conclusion of a license agreement is possible on a free basis.
- Termination of the contract . In the event of termination of the concession agreement, the user receives a preemptive right to conclude a new agreement in this territory. If the copyright holder refuses this, then he cannot conclude a deal with a new user in this territory for a year. Termination of the license agreement does not entail any special consequences.
standard sample of a franchising agreement (franchise).
Read in this material about what you should know about franchising and what is the documentary support for the transfer procedure, and here there is information about franchises from Sberbank.
Why is a franchise agreement important for both parties?
If you are a future buyer of a franchise and think that the franchise seller has no need for an agreement, because this is his proposal, and he will a priori act as needed so that everything is great for everyone, you should be upset. And if you are a franchise seller and think the same thing, it’s doubly frustrating.
Unfortunately, on the market you can find many franchise offers that were created “in haste” and their owners themselves do not really understand how everything should work in order to bring profit to both parties.
The fact is that franchises are created on the basis of existing companies that worked independently. And here it is important why an entrepreneur decides to create a franchise offer.
Main reasons:
- Strengthen the brand and increase its awareness.
- Expand the company’s zone of influence and gain a foothold in the market.
- Find a new audience.
- Make money quickly amid the popularity of franchising.
And if for the first three reasons the franchising agreement is important as a legal guarantor of high-quality cooperation with partners, then the last option provides the answer to why the agreement is important for a potential franchisee.
The fact is that many proposals are entering the market, the purpose of which is to make a quick profit. That is, the company creates an offer without thinking about its quality and is confident that there is no need for this. The main thing is to sell a few franchises, the rest will follow.
The fate of such companies can be easily predicted. They will either close quickly or close the franchise and lose a lot in reputation. But they will drag down gullible franchisees along with them. That is why, for franchise buyers, an equally important point when evaluating an offer is the drawn up franchise agreement.
Key points of compilation
The key points that must be taken into account by both parties when concluding a commercial concession - franchise agreement are the following factors:
- Like any commercial agreement, a franchise agreement must be drawn up in writing by the parties to the transaction. This is expressly stated in Art. 1004 of the Civil Code of the Russian Federation. However, the law is based only on minimum requirements. In practice, in addition to drawing up an agreement in the form of a document, its legal support is required. What does this mean? This is a thorough study of all points of the agreement by professional lawyers. Yes, it may cost some amount of money and effort. But it is better to spend a small part of your funds than to later spend larger sums on lawyers and advocates during proceedings in arbitration courts. In addition, it is recommended to register or notarize such agreements using the services of a notary.
- The second most important factor when concluding a commercial concession agreement is checking (at least minimally) your counterparty for his powers, legal status and legal “purity”, absence of criminal or administrative prosecution, powers of representatives of the franchisor company, etc. This can be done with simple steps. For example, you can use publicly available services, such as the websites of the Federal Tax Service, the Bailiff Service, and the Federal Register of Bankruptcy Information (whether your counterparty is bankrupt at the time of the transaction). Even such a minimal check can save an entrepreneur from many commercial and legal risks.
- The next most important point is checking whether the franchisor company really has the rights to a particular product of intellectual work, copyrights to advertising, etc. Those. whether he has the legal fact of owning the franchise proposed for purchase. It may also be that the subject of the franchise is generally prohibited in civil commercial circulation or that such circulation is significantly limited. For example, only the Russian Federation, represented by its Government, has exclusive rights to use the coat of arms of the Russian Federation, the Russian flag or anthem. Therefore, the inclusion of this element in the franchise will be illegal from the very beginning. For this, both the franchisor and his counterparty, the franchisee, can be held accountable and receive a considerable lawsuit from the state.
- The next critically important condition when drawing up a franchise agreement is the procedure for using the subject of the concession agreement - the franchise. This should not only be a detailed description of the franchise (the technical description is usually attached to the document itself and is also subject to registration), but also how exactly it should be applied by the franchisee. This paragraph also specifies restrictions. For example, a franchisee does not have the right to use the obtained competitive advantages against its counterparty. Those. It is prohibited to use new technology against the franchisor or to carry out activities under the franchisor’s trademark outside the pre-agreed territory - city, region or country.
In addition to these key points of the franchise agreement, factors such as determining the final duration of the agreement or designating it as indefinite should also be included. The issues related to the settlement of possible disputes are also specified - the judicial jurisdiction or the arbitration party is determined in advance, which will serve as an arbitrator in the event of any disagreements between the parties to the agreement.
Why you need to read the franchise agreement
As a rule, the text of the agreement is drawn up by the franchisor, which is logical. Because he makes an offer, and the buyer considers it. Accordingly, the conditions that are prescribed in this agreement come from the seller.
And the buyer should understand that essentially what is written in the contract is the full terms and conditions and a complete list of what he heard about from the advertising offer or from the franchisor himself. So complete that you can rely on it as a guarantor in case of disagreement. This means that everything should be taken into account there.
But it may also include something that will not be included in any advertising offer. More precisely, he will include it. And it is important that such information does not come as a surprise to anyone.
For example, for some reason, a franchise CP may be silent about the so-called “advertising fees”. Meanwhile, this information refers to information that may also influence the final purchasing decision.
Franchisees who are going to sign an agreement based only on information received verbally (or information from the CP) are putting themselves at a severe disadvantage. With a hundred percent probability, unpleasant surprises await them.
On the other hand, it is also important for the franchisor that his future partner, before agreeing to the terms of purchasing a franchise, is fully aware of them. Because a dissatisfied franchisee cannot do anything good for the company. And at a minimum it will be a waste of time and resources.
Peculiarities
If the use of one or more rights transferred under a contract whose validity period has expired, only the provisions relating to these rights cease to apply.
However, it is worth considering that upon expiration of the term of use of the right to a trademark, the copyright holder is obliged to provide the user with a similar right , otherwise the agreement automatically terminates.
When extending the concession agreement, the legislation provides for the preservation of the previous conditions . However, if market conditions change, this may be contrary to the interests of the franchisor; therefore, signing a new agreement is often preferable.
The pricing policy cannot be set by the franchisor.
A contract term obliging the user to sell goods or provide services only to persons residing or located in a specific territory is void.
It is acceptable to include conditions that provide the user with the opportunity or oblige him to transfer the acquired rights, in whole or in part, to third parties . The transfer of rights is carried out under a subconcession agreement.
Legal regulation of a commercial concession agreement is carried out on the basis of Chapter 54 of the Civil Code.
Why a contract must not only be read, but also professionally checked
A franchise agreement is a legal and official document. A good agreement contains data on the interaction between the franchisor and franchisee, describes the rights and obligations of both parties, algorithms for resolving disagreements, fines and penalties for failure to fulfill obligations, etc. In a word - a lot of information.
And on the one hand, this is necessary, useful and correct. On the other hand, it can become a tool in the hands of unscrupulous entrepreneurs. And both on the part of franchisors and on the part of franchisees.
Any vague wording can be used to mislead one of the parties. You may simply be confused by using substitution of terms.
And it’s difficult to evaluate legal documents without being a professional. Therefore, mistakes happen often.
How to protect yourself when signing a franchise agreement
Be careful and check everything carefully. This is a household option. It’s not even an option, but necessary measures in any situation.
The main option to get at least some guarantees was and remains - contacting a person or a company that specializes in such things.
At the same time, you shouldn’t cross out this option just because of additional expenses. On the contrary, the costs may be much higher if you do not make sure that the contract is drawn up as needed.
After all, if disagreements arise in the future, the first step to resolving them will consist of turning to the contract, where rights and obligations should be outlined. And you didn't check it properly. In general, we hint that the saying “the miser pays twice” comes in handy here.
Who to turn to for professional help
The more franchising develops in our country, the more companies specializing in the legal field of this industry appear on the market. However, we still recommend contacting those who have the most experience and practice.
For example, who has been doing this for more than 9 years. And most importantly, it provides services to both franchise buyers and their sellers. That is, he has comprehensive experience.
You can cooperate with the company both at the stage of making a decision to buy or sell a franchise, and at those stages “when it’s too late.” That is, when a problem has already arisen and requires a solution.
For those who are at the first stage, and it doesn’t matter - from the buyer’s side, or from the seller’s side, “Bureaucrat” has a specific service. It’s called “Creating a Franchise Agreement.”
Security measures
The main security measures when concluding agreements such as franchise agreements are:
- working with companies that have positive experience in the franchising market and reputation
- it must be a company with a full legal address, have a real working business, and not just a sign and a virtual phone number
- It is desirable that the counterparty under the franchise agreement be registered in the Russian Federation
- inquire in advance whether there is a patent or copyright, as well as a license to use certain technologies, databases, software, etc.
https://youtu.be/2pHsCSAj32k
What's included
- The intellectual property objects that must be transferred upon signing the contract are agreed upon.
- The legal mechanisms for this transfer are determined, and the correct wording in the contract is approved.
- The procedure for using the franchisee's intellectual property is established.
- The responsibility of each party is indicated.
- Rights are indicated.
- The size and order of payments (one-time and monthly) are agreed upon and fixed.
- Determines how the information obtained as a right can be used.
- Coordination of the contract registration procedure.
