If you want to limit your risk by using, for a price, a concept which is already proven, a well-established brand image, the franchise model may be something to consider. This is not a legal form, but a type of contractual partnership.
The franchise contract establishes a relationship with a franchiser, giving a franchisee the right to make use of an original concept relating to its brand, name, or technical or commercial know-how in exchange for remuneration (which may be a royalty or exclusive purchasing rights).
The concept
The franchise is a system of collaboration between distinct companies which are linked by a contract by virtue of which one of them (the franchiser) grants to the other (the franchisee), in exchange for the payment of a royalty, the right of use, under certain conditions, of a brand or commercial form represented by a name, while providing assistance and regular services intended to facilitate this use.
A franchise contract differs from an agency contract or a concession contract insofar as, if the franchisee is independent like the distributor, it benefits from the franchiser's know-how and technical and commercial assistance.
A franchise can be exclusive, non-exclusive or "sole and exclusive".
Main types of franchise
Franchises traditionally fall into three categories:
The distribution franchise
This is the most common type of franchise. This is in turn divided into two subcategories:
- The production franchise
In the event that the franchiser is a producer who distributes products it manufactures or has manufactured by a third party under license as part of a specialist and uniform network of franchisees.
The distribution franchise
In the strictest sense, it is a type of franchise in which the franchiser operates as a purchasing center from where the franchisees obtain products bearing the brand in question.
The services franchise
The franchiser creates an original service concept which will be distributed by the franchisees, who are service providers to customers;
The industrial franchise
The franchisee itself produces goods based on the know-how communicated by the franchiser, to then distribute these goods under the franchiser's brand.
Once the contract had been concluded, the franchisee operates the business on its own behalf and at its own risks. However, the service's sale or distribution system remains the property of the franchiser. Three important payments are generally made to a franchisor: (a) a royalty for the trademark, (b) reimbursement for the training and advisory services given to the franchisee, and (c) a percentage of the individual business unit's sales. These three fees may be combined in a single 'management' fee. A fee for "disclosure" is separate and is always a "front-end fee".
Pros and cons
Some of the advantages of this business type are:
assistance from the franchiser to the franchisee during creation of the company
communication of the know-how and permanent assistance from the franchiser
Various tangibles and intangibles such as national or international advertising, training and other support services are commonly made available by the franchisor.
advice from the franchiser on sale price: however, the franchisee may not be directly or indirectly restricted when it comes to establishing a sale price
use of the business by the franchisee in accordance with the franchiser's directives.
Some disadvantages of the franchise model are:
- the control of the franchisee's business by the franchiser: for this it has staff who provide not only operational supervision but economic supervision of the business. The franchisor and franchisee must agree to avoid friction, which seems inevitable since one is obliged to interfere in the affairs of the other to exercise their rights. Franchise agreements tend to be unilateral and in favor of the franchisor. They carry no guarantees and the franchisee has little or no recourse to legal intervention in the event of a dispute.
- Local events, such as the timely development of new competitors or changing local habits, may require the franchisor to make changes or reforms that work against the franchisee but are in the interests of the network.
Since February 1st, 2006, a law requires the franchiser to provide any franchisee applicant with the data required to carry out a legal and economic assessment of the offer being proposed. The pre-contractual information document must be provided at least one month before the conclusion of the agreement.
More information can be obtained on the Belgian Franchise Federation's website.
