Franchising

Starting up a business is usually associated with costs, insecurity and entrepreneurial risk. On the other hand, an intention to increase the sales of goods and services of an existing business may be linked with shortage of personnel and capital. A solution to both problems is called franchising.

Taking a walk in any shopping mall gives a very similar picture. Individual shops differ from each other in their visual display, choice of furniture, placement of goods and the form of their presentation, as well as in the behaviour of their service personnel. However, shops of the same brand in various shopping malls function in the exactly same way. If they are run by the same entrepreneur, it is easy to explain. How is such similarity possible in the case of mutually independent entrepreneurs? Unfair competition? Stealing of ideas? No. This phenomenon is called franchising.

The decision to start a business is connected with several difficult questions – in which sector shall I conduct business? What goods or services am I going to sell? How do I make a feasible business plan? How do I get a loan to finance the start-up phase of my business? Once the first question is answered, it is best to stop and consider who is going to be my competitor and who could be my partner. Doing business by means of franchising can offer answers to the remaining questions. The franchisee buys the support of a stronger partner – the franchisor – but still remains an independent entrepreneur. He thereby gain a swifter, more secure entry into the market, support with the start of their enterprise, detailed information about the market and the possibility to exchange information with the franchisor and often other franchisees. The result is a lower level of entrepreneurial risk. The approach of banks towards financing such entrepreneurial prospect is considerably more favourable, since the franchising format is already proven in practice.

On the other hand, there may be an entrepreneur who wants to expand the sale of his goods and services into new territory. His financial resources, personnel capacity and knowledge of local conditions in new markets are usually limited. Cooperation by means of franchising can offer a solution to these requirements and reduce the risks of expansion.

Franchising operates on the basis of a contractual agreement between two independent business parties, the franchisor and the franchisee, in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor’s branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor. The essence of franchising is therefore the utilization of the proven experience and know-how of one entrepreneur, the franchisor, by other entrepreneurs, the franchisees. The common element in high-quality franchising formats is continuous support and consulting provided by the franchisor to the franchisees, as well as common marketing activities for the whole network.

Franchising is not completely risk free and does not guarantee automatic success. The disadvantages of franchising, according to the Slovak Franchise Association, include for the franchisor the risk of potential failure on the part of the of franchisee, which can leave its mark on the whole franchising format; and the training of a future competitor impersonating the role of a franchisee. Last but not least, the disclosure of the franchisor’s secrets can also pose a risk. The franchisee, for their part, must accept that the price of support consists not only of regular fees but also of the limitation of their entrepreneurial independence, as well as submission to the control of and dependence on the franchisor.

All of these matters must be born in mind during the selection of an appropriate franchising partner and during the negotiation and conclusion of a franchising agreement. There is still no separate legal regulation of franchising agreements in the Slovak republic. It is therefore necessary to establish detailed and accurate regulation of every detail of the mutual cooperation. For the franchisor it is mainly the protection of confidential data related to the franchising format included in the manual or provided directly by the franchisor. The right to inspect for compliance with agreed rules, stipulations regarding fees and the end of mutual cooperation are among the most important areas regulated in the franchising agreement.

If the use of the trademark is also part of the provided franchising format, it is necessary to incorporate a licensing agreement into the franchising agreement and register it at the Industrial Property Office.

The need for unity of the whole franchising format leads to certain limitations on competition, which the European commission has dealt with on a European level, especially in the form of Regulation Nr 330/2010 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, which contains a detailed explanation regarding the rules applied within the European Union. In this regard it is necessary to mention the Act on the Protection of Economic Competition, which is applicable in the Slovak Republic.

We can take the question of common price-setting within the franchising format as an example. Determination of maximum prices or non-binding price recommendation within franchising format is in accordance with the regulations currently in force; however, determination of minimum prices is contrary to applicable law. The obligation to take goods from the franchisor or an authorized supplier, prohibition of cooperation with the competition during or after the end of the franchising relationship, are only a couple of the important legal questions which need to be solved before the beginning of a cooperation and duly regulated in the franchising agreement. At the same time it is necessary to acknowledge that bad agreements will lead to difficult times, and that good agreements make for good business partners.

Franchising is suitable for businesses of every size and not only for international corporations. Even local and mid-sized entrepreneurs can use this format. What makes it special is a sophisticated business idea can be transformed into a high-quality manual and franchising agreement. Despite all the odds, franchising is an appropriate and proven manner of entrepreneurship, according to which entrepreneurs working as partners strive to reach a common goal, i.e. entrepreneurial success. The joint motivation of both partners enables remarkable achievements.

Author:
Pavol Rak, Associated Partner, Noerr s.r.o.
This article is of an informative nature only, should you need any further information on the issue addressed in this article, please contact our Law Office
Noerr s.r.o., Tel: +421 2 59 10 10 10, Email: recepciaba@noerr.com, www.noerr.com