What franchising is not

Caution: The frontiers between franchising and other forms of businesses with independent operators is a delicate
Professional advice is recommended when considering signing any such business contract.

The modernisation, expansion and globalisation of commerce and markets has led to a multitude of types commercial relationships involving an association of independent business operators banded together to draw greater benefits from the pooling together of resources. Each type has its specificities.


The following business schemes may share elements with “business-format franchising” but should not be assimilated to business-format franchising, nor called “franchising”.

Corporate chain store: a chain of outlets are commonly owned and controlled by a single company and its branches or subsidiaries; employ central buying and merchandising and sell similar lines of merchandise.

Voluntary chain: a network of independent retailers or service companies (i.e. hotel chains) engaged in centralised bulk buying, and eventually some common merchandising, common standards of service but leaving a fair margin for individuality in outlet name, design and operations. The chain entity is structured as an enterprise*. The relationship between this structure and the chain members may be contractual or corporate (corporate relationships being either cooperative or capitalistic)

Cooperative: a network of independent businesses each part-owner of a central entity which acts as a buying platform; may conduct joint promotion efforts; many cooperatives today also develop a separate “business-format franchise” entity to accelerate the growth of the network in which the “distributor” may or may not also be a part-owner of the cooperative.

Licence or brokerage agreements

A licence right may relate to any of the following Intellectual ((intangible) Property Rights-IPRs:
trademark, name/brand, patent, copy right, legally protected design, trade secret, manufacturing process or any item of value.
The licenser sells the right to USE the licence (not the ownership of the licence) under the terms of the agreement to an independent licensee who in return pays a fee or royalty.
All franchises necessarily have a licence component to their franchise contract, and this is an essential element of any franchise contract, but business-format franchising offers, in addition, a business format which sells as a packaged business proposition.

Note: Under EU Competition Law, franchise agreements benefit, under prescribed conditions, from the terms of the Block Exemption Regulation on Vertical restraints as applied to distribution agreements (distribution of products or services) because the Commission considers the primary object of franchise agreement to be the distribution process and not the license even if the licence component is a necessary and essential element of any franchise agreement.

Agency agreements: the agent acts for and in the name of the principal for a fee; usually; unless otherwise specified by contract, an agent does not assume the risk or venture of the deals; an agent is not an independent entrepreneur as a franchisee is understood to be the purposes of a franchise agreement.

Broker agreements:
i.e. Independent brokers or agents who sell financial services supplied by financial institutions.
Closer to agency agreements than to franchise agreements. For example, if one of the following essential elements is absent, they cannot be qualified as a franchise agreement: initial & ongoing know-how, does the “franchisee” have the right to sell the business?, who owns the customer base, etc.?
 


Selective distribution-SD:

The BER 330/2010 states that a ‘selective distribution system’ means a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system giving the right to a selection of intermediary dealers to sell a company’s products or services;
The difference with franchise agreements (which may include an element of ‘exclusive distribution’) is the selection criteria for each distributor: in SD, the specified selection criteria must be standardised. In franchising, franchisors have full liberty in the recruitment criteria & procedures of their future franchisees.
One of the advantages of franchising for a franchisee is that the business-format offers the opportunity to candidates with no or limited independent business experience to own and run a business.

* source: Distribution Law in Europe, E&Y, 2001

For clarification on the subtleties of the differences or overlap between the networks described above and franchise agreements, the EFF highly recommends consultation with experienced distribution/franchise lawyers/attorneys.

 

 

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