INTRODUCTION
Faced with the globalization of the economy, it is necessary for all companies to seek new forms of market penetration; for this reason, it is vitally important to choose a mode of income that is in accordance with the company's strategies.
The modes that exist to enter new markets are:
- Export: Most companies begin their global expansion with this mode, which avoids the costs of establishing operations in other countries. This mode is applied most of all in the international arena. Licensing: International licensing is an agreement in which a foreign licensee purchases the rights to manufacture the products of a company in their country for a negotiated fee. Joint Venture: It is an agreement between two companies, one foreign and one local, in which both parties contribute a certain percentage of the share ownership and share operational control, the most typical form is 50/50, although 49 / 51, where the party with the highest percentage has stricter control. Own subsidiaries: It is the establishment of operations by a firm, assuming all the installation and operation costs, in which the company assumes 100% of the shares. Franchise: It is a strategy used by companies both producing goods and services to enter new markets. This contract is within the association contracts, which are conceived in the law of commercial distribution. Examples include Mc Donald's, Hilton Hotels Corp., in the world market and Presto and Mimo's, in the national market.
The franchise concept was developed in the United States in the second half of the last century when the "Singer Sewing Machine Company" in 1850 established a distribution chain, granting territorial exclusivity to its representatives, in exchange for a payment. This method has been very well received and in the United States alone in 1991 there were 2,500 franchises.
1. CONCEPT OF FRANCHISE
The franchise is a development technique that allows a company, the franchisor, to license a set of industrial or intellectual property rights related to brands, trade names, trademarks, utility models, designs, copyrights, Know How; to a third person, whether natural or legal, in order to obtain economic returns from the resale of products or the provision of services to end users.
Art. 142, 1st paragraph of the Mexican Industrial Property Promotion Law:
«There will be a franchise when the license to use a brand transmits technical knowledge or provides technical assistance so that the person to whom it is granted can produce, sell goods, or provide services in a uniform manner and with the operating, commercial and administrative established by the owner of the brand, aimed at maintaining the quality, prestige and image of the products or partners that it distinguishes »
International Franchise Association (IFA):
«The franchise operation is a contractual relationship between the franchisor and the franchisee, in which the former offers and is obliged to maintain a continuous interest in the latter's business in matters such as Know How and training, in this operation the franchisee uses the common commercial name according to a format or pattern established and controlled by the franchisor. This implies that the franchisee invests his resources in his own business.
2. MAIN TERMS:
2.1. Franchise:
2.1.1. Franchise as contract
The franchise is understood as the perfection of a negotiation or transfer of rights and obligations related to the operation and functioning of commercial units or points of sale on a specific territory and under special conditions.
2.1.2. Franchise as a service provider unit or point of sale
Set of visible physical elements, in other words of the establishment and its way of functioning.
2.1.3. Franchise as a business organization system
It includes all the integral elements, such as: Franchisor, franchisee, Know How, brands, suppliers, contracts and other parts in this way of doing business, its methods of administration, distribution, advertising and patterns of operation.
2.2. Franchisor or franchisor:
It is the employer and / or the company that assigns the rights, directly or indirectly to others to exploit and commercialize products and services, for a specified period of time, receives financial consideration for it and acquires a series of obligations with the franchisee as support and business development assistance.
The rights granted range from the use of an emblem or trademark to the transfer of specific technology and knowledge, partially or continuously over time.
2.3. The franchisee:
It is the person or independent entrepreneur who acquires the rights assigned by the franchisor and contracts certain obligations with it for the operation of its own business through one or more franchised units.
2.4. Know How and technical assistance:
It is the transmission of the management model that has been developed during the evolution of the franchise system or the operation of own units. It is the way of doing things, it is how the business has worked in other units, it includes the processes necessary for the operation of the establishment. It is transmitted through manuals, advice and the permanent training that exists in some types of franchises.
2.5. Financial considerations:
These are the payments that the franchisee makes in return for the use of the rights assigned by the franchisor, these are mainly:
- Entrance fees or «Franchise fee» Payment for the continued use of labels, brands, patents and knowledge, called royalties or «royalties». Contribution to common funds of the chain.
2.6. The brands:
They are the names, signs or commercial images that producers or distributors use to differentiate their products or services from others and by which they are distinguished. These belong to those who have duly registered with the competent bodies (OPI), as belonging they can be sold, leased or transferred to third parties, in the case of franchising to franchisees.
3. CLASSES OF FRANCHISES
3.1. According to the rights granted
3.1.1. Individual franchise
It is granted by the owner of a master franchise or by the initial franchisor to an individual investor for the management and operation of a single establishment, in a determined area.
3.1.2. Multiple franchise
Through this type of contract, the rights to open several establishments in a defined geographic area are transferred to a single franchisee, who is obliged to operate them all without transferring the acquired rights to a third party.
3.1.3. Master franchise
Through this, the franchisor assigns the rights to use its brand and Know How to a franchisee so that it can exploit them in a wide geographic region through its own products or by delivering multiple or individual sub-franchises.
3.2. According to the purpose of the franchise or branch of economic activity:
3.2.1. Industrial franchise
In this franchise, the franchisee establishes and operates an industrial company, under the technological concepts, consulting, branding and training that the franchisor gives him.
3.2.2 Distribution franchise
The franchisor transfers the products that it manufactures and / or the brand to its franchisees in exchange for royalties or higher purchase prices. Its basic characteristics are focused on the development of the product or service, rather than on the operation of the business. The franchisee is granted more freedom, but at the same time less operational contribution.
3.2.2.1. Product franchise and brand or non-exclusive distribution franchise
The franchisor grants the franchisee the authorization for the use of its brand, together with the sale of certain products and / or the provision of certain services, which are generally supplied by the same franchisor through its license.
The franchisor does not grant territorial or product exclusivity. The quality and quantity of support provided by the franchisor are minimal, despite some requirements.
3.2.2.2. Exclusive distribution franchise
The difference with the previous one is that the network of stores that operate with the franchisor's brand on the facade is the exclusive channel for the distribution of its products or services.
3.2.2.3 Conversion franchise
It consists of the association of a group of companies, agencies, warehouses already existing under a single format. The main objective is to unite their marketing efforts, showing a unique facade, promoting sales through massive advertising programs and systematizing the quality of service offered to the consumer.
The first associates, in turn, can receive future franchisees or assign these rights to owners of similar existing businesses, willing to change their name and their methods for those of the franchise.
3.3. According to the evolution of the concept, rights assigned and transmission of Know How
3.3.1. Brand or first generation franchise
It basically corresponds to brand licenses. The franchisor only grants the rights to use a trademark, design and / or industrial drawing to the franchisee for an established financial consideration and for a single time, if it is a temporary design or fashion, or compensation in time or royalties, if it is a permanent design or brand.
3.3.2. Business or second generation franchise
In addition to the transfer of the brand, the form of operation of the business is granted, "the recipe", but this advice does not extend in time, nor in the depth of the knowledge transferred.
3.3.3. Third-generation format franchise
The franchisee receives a complete system to operate the business, a total plan that includes the assistance by the franchisor in finding the right place to set up the business, training and staff training in all areas of it. This training continues for the life of the franchise agreement.
The franchisor grants the franchisee exclusive territory, and the latter sells or distributes the products or services exclusively.
The franchisee receives: procedure manuals, advertising support, assistance in purchasing equipment and adequate sources of raw materials or products.
4. ADVANTAGES AND DISADVANTAGES OF THE FRANCHISE
1. Advantages of the franchisor:
- Low development costs and risks, because the cost and risk are borne by the franchisee Generates a global presence at low cost Quickly take over the market Value and capitalize the brand Management or mastery of distribution Make economies of scale Prepare financial operations Obtain consumer loyalty Act on innovation
2. Advantages for the franchisee:
- Guarantee of independence, the franchisee will always continue as his own boss, even if he is the one who works in his own business establishment The acquisition of knowledge (Know How) Reduces the risk of starting a business activity Obtains better purchase prices in ratio of the total volume of supplies of the franchise Benefit from a well-known name Initial and permanent training, because this is an evolving contract: products, service, Know How are subject to constant improvement with the sole purpose of making progress The experience of the pilot center The logistical support of the central Advertising.
3. Disadvantages for the franchisor
- Possibility of indiscipline of the franchisee, with its dire consequences for the chain Possibility of choosing franchisees not suitable for managing the growth of the chain, and its late detection Danger of discrediting the brand Lower profit for the franchisor, compared to that obtained through its own chain Possibility of fraud in royalty and royalty reports Lack of control over quality Inability to engage in global strategic coordination
4. Disadvantages for the franchisee
- You must pay periodic initial amounts to the franchisor. You do not own the name and trademark. The decisions about the policies to be followed are made by the franchisor. You have restricted rights to have your own business. It is tied to the fate of the franchisor and everyone and each of the other franchisees.
5. LEGAL ASPECTS
5.1. The franchise agreement:
The franchise agreement is the document that clarifies the type of relationship between the franchisor and the franchisee, as well as their responsibilities, obligations, limitations and rights. The contract basically comprises, according to the jurist Marco Antonio Velilla Moreno, the trademark and / or patent license contract, the Know How transmission contract, the technical consultancy contract and the product distribution or supply contract. Industrial franchises can also include an engineering contract and a technology transfer contract linked to a patent.
The trademark assignment or transfer contract
The applicable legislation in relation to this issue is Decision 344 of the Cartagena Agreement. Article 115 of this establishes: "The owner of a registered and current trademark of products or services may assign it in use or transfer it by written contract." The foregoing implies that an essential requirement to assign or transfer the trademark is that it is registered and in force.
The registration must be made before Incomex, if the contract is made between a resident abroad and a resident in the country. Whereas if the contracts are made between foreigners or by Colombians, the registration is made before the Superintendence of Industry and Commerce, in the Division of Distinctive Signs. The license or trademark transfer agreement cannot have trade restrictive clauses. In accordance with the legislation, INCOMEX may deny the registration of the contract if the franchisor unilaterally sets the price of the products, if the concessionaire within the contract is obliged to transfer all the technological improvements to the grantor or if it accepts the prohibition in the agreement. to export the products obtained in terms of franchise.
The Know How broadcast contract
This contract corresponds more to a definitive transfer than to a license, as in the case of patents or trademarks, etc. The main interest in the case of licenses is to allow the temporary enjoyment of trademarks or patents. In the case of Know How, what is sought is that it remains secret. It is important to bear in mind that the franchisor may somehow lose control of the secrecy in relation to the franchisee, since it is very difficult for the franchisor to prevent the franchisee from continuing to use the Know How after the termination of the contract.
The transmission of Know How should be done through documents such as plans or formulas. They can also be confused, in the event that the Know How is not included in a specific document, with the training contracts at the franchisor's headquarters and with the technical assistance at the franchisee's facilities.
Franchise contracts that contain copyrights must additionally be registered with the National Copyright Office attached to the Ministry of the Interior.
The technical assistance and technical services contract
It is a service or set of services that are provided during and / or after the execution of a project. It basically consists of the assistance necessary for the effective transfer of technology and refers to the use, maintenance and repair of machinery and equipment. Technical assistance is generally supported by a pre-existing operation, such as the licensing of a patent or Know How, or it can occur after a commercial equipment sale contract.
The supply contract
It is the contract by which one party undertakes, in exchange for a consideration in favor of another, independently, to periodic or continuous provision of things or services.
The engineering contract
It is one by means of which a company undertakes to assume the obligation to start up industrial equipment of different kinds: refineries, factories, ports, roads, among others. The foregoing may include the study of the project and its conditions of implementation, advice to guide the execution of the project, supply of materials of technical means, search for financing and implementation of the project. Within this contract, there are three obligations on the part of the franchisee:
- Obligation of confidentiality: The franchisee must keep the knowledge acquired. Non-competition clause: The franchisee may not compete with the franchisor for the duration of the franchise and after a period of termination. Clauses related to respect for identity and reputation of the chain: The franchisee must respect commercial methods and use the knowledge acquired from the franchisor, nor can it make brand concessions or act under parameters not established in the contract.
5.2. Characteristics of the franchise agreement
- Onerous: it forces the fulfillment of economic benefits, where both parties are taxed and both benefit. The franchisee must pay the franchisor for receiving the industrial property license, technical assistance and for the inclusion in the advertising strategy. Consensual: For its improvement, an agreement of wills is needed. But because of the costs involved in the business, the parties decide to make it solemn. Successive tract: it runs through time. The parties commit themselves for long periods of time, during which they must comply with the set of obligations established in the contract in a systematic and permanent way. Atypical: it does not have express regulation by law. Commercial: the parties are always merchants, the franchise implies the exercise of a commercial activity, however,there is no employment relationship between the parties Bilateral: implies obligations for both parties, franchisee and franchisor Main: the franchise contract exists by itself, therefore it does not depend on another relationship
5.3. Main Clauses:
The franchise agreement offers a multiplicity of options as it depends on the great variety of businesses that operate under this system, as well as the different interests of the contracting parties. Although the clauses in them are variable, they are the legal basis of the relationship between the franchisor and the franchisee, therefore it must cover all aspects of the business, as well as the obligations, rights and limitations of the parties.
Main clauses that a franchise contract must contain:
- The contract must begin by explaining what kind of document it is, its objective and the special considerations that motivate the signing of the contract. Definition of the terms that identify the parties such as the franchisor or franchisor company, owner of the business and the franchised company or franchisee, which wishes to reproduce it. Exclusion of employment relationship between the parties and waiver of compensation for this concept. It is very important to emphasize the independence between them, which characterizes the contract and allows it to be developed differently from other contractual forms.Description of the business, ownership of the names, brands, processes and other details belonging to it is established. In the event that the contract is granted by the owner of a master franchise,The data and dates that identify the master franchise agreement must be included. Additionally, the distinctive signs that are licensed must be listed. Territory. This section must specify the geographic area that the franchise must serve exclusively. The population density, the socioeconomic level of its inhabitants, the entry barriers for competitors in the area must be carefully evaluated. Additionally, it must be taken into account whether the franchisee may or may not use other distribution channels for its products in the same area. It is important to delimit the area of influence for the provision of the home service. Training of the franchisee and their employees. The training program, place,responsible for the costs of the same if the attendance of the franchisee is mandatory and what happens if he does not attend, how many people is the course directed to, exams for the evaluation of the franchisee's performance, among others. Operations manual. It is the obligation of the franchisor to deliver a manual that guides the operations of the franchisee.In this clause the description and objective of the manual are given, the guidelines for its reform are established, which is understood as a living document, capable of being changed by the franchisor Technical assistance. The description of the initial and continuous advice that the franchisor will provide to the franchisee is defined here, as well as the specific obligation of the first with regard to advice and training,who defines the need for the advice and the parameters under which it is determined, what is the process and the cost of the additional advice. Inventory and supply. List of the suppliers of the required inputs, what is the specific obligation of the franchisor in terms of suppliers, what is the process of buying, acquiring or using equipment from another supplier Inspection. The franchisor has the obligation to exercise continuous vigilance over each of the franchisees, in order to provide assistance and protect the investment of the other franchisees and the integrity of the system. It must be established how and who will be the people in charge of carrying out the inspections, the periodicity of the same and the process that is developed in each one of them. Updating of products and procedures.The franchisor's commitment to the permanent improvement of the business through the development of new products and procedures must be clarified. For its part, the franchisee is obliged to include new products, elements, marketing strategies or any other change that the franchisor or other franchisees have developed, as well as the deadline for their implementation. Licensed industrial secrets and confidentiality thereof. It obliges the franchisee to keep the knowledge and principles acquired from the franchisor. For the breach of this obligation, the franchisee may be sentenced to indemnify according to contractual liability. Non-competition clauses.The franchisee is prevented from engaging in businesses that compete directly with the franchisee during the term of the franchise and after a period after withdrawing from the system. The clause must have a precise duration in time, be limited in space and be reduced to a specific sector or activity. Clauses related to respect for the identity and reputation of the chain. The franchisee must respect business methods and use the knowledge transmitted by the franchisor. For example, a clause can be included that specifies the obligation on the part of the franchisee to maintain a uniform image through the presentation of employees, quality controls and inspection visits. The franchisor's obligation is established to monitor the performance of the franchisee,in order to protect the proper functioning of the system. Entry rights, royalties and other remuneration in charge of the franchisee. Financial and management reports to be submitted and the regularity of the same. Obligation of the franchisee to keep certain types of accounting books, for a specified period of time, submitting reports and reports to the franchisor. Strategies and advertising campaigns. Guidelines, rights and obligations related to the creation, operation and termination of the advertising fund. Validity and renewal of the contract. The initial term of the contract must be related to the amount of the investment in the license, the set-up price of the business and therefore with the period of recovery of said costs. For the renewal of the contract you must take into account,if automatic renewal is contemplated, after compliance with certain requirements by the franchisee. The cost of renewing the contract must be less than the initial cost, since the franchisor does not incur costs of linking a new franchisee, or for their training. In the event that the franchisor does not wish to renew the contract, a clause must be included in which a period of notice is defined. If this does not exist, in any case it is necessary to notify the franchisee with adequate anticipation, otherwise litigation may arise, causes of the termination of the contract and obligations that arise on the occasion of the same. The contract defines the behavior of the franchisee, in case of non-compliance by the latter, he will lose the right to the franchise.The procedure must be established to apply the sanctions, whether it incurs in the automatic termination of the contract or in the opportunity to rectify the faults. Transfer of interest. Establish the rights and limitations of the franchisor to assign the contract to third parties, that is, their freedom to sell the franchisor company. Establish the obligations and limitations against the transfer of the contract by the franchisee. Given that the franchisor must reserve the right to choose its franchisees at all times, they cannot assign the rights and obligations derived from the franchise agreement, without their due authorization. The handling and procedures should be clarified in case of changes in the ownership of the franchised company, the process of approval of the assignment,what is the participation of the franchisor in the profits of the transfer of interest and the obligations acquired by the transferee. It must be established whether the franchisor has the right of first refusal to acquire the franchise contract, what is the term of the validity of this right and under what conditions it can be exercised. In the event of the death of the franchisee, the conditions must be established, rights, obligations and limitations arising from this fact.Some obligations of the franchisee must be stipulated after the end of the contract, such as: payment of debts, obligations acquired with the franchisor, procedures related to the use of distinctive signs, transfer of telephone lines, home service, inventory management, business documentation, among others.The limitation of the franchisee must be clarified to refer to the brand object of the franchise contract in its establishment of commerce.If the contract is abruptly interrupted by either party without notice, there is room to claim compensation from the injured contractor, in cases such as: the non-renewal of the contract at the last moment when the intention to continue with it had been expressed, the modification of some important clauses within the contract. It also occurs when a doubtful interpretation is given to the clauses of the contract, or when the products are not promoted properly by the franchisor. The foregoing may show the intention of the franchisor to change the franchisee for another and cause a breach of the contract for fictitious causes. Contract amendments.Under what circumstances and in what way can the modifications to the franchise agreement be made.
5.4. Breaking the franchise agreement
5.4.1. Causes of contract breaking:
- Fixed term contracts: It is when the contract termination date is stipulated. In these, the renewal of the contract or the definitive termination may be agreed, in this case the franchisor must notify the franchisee in advance (advance notice). Indefinite-term contracts: The contract can be terminated at any time by the parties.
5.4.2. Consequences of the break:
- Stocks: It is only presented in distribution contracts, generally the franchisee can sell the merchandise that remains in his possession in a reasonable period of time. In some contracts, a clause is added in which the franchisor buys the stock from the franchisee. The brand: The franchisor cannot use the franchisor's brand after the contract is broken. The banner: The franchisee must return the banner to the franchisor or use it to finish selling his stock, but when the sale is finished, he will not be able to use it anymore.Customer ownership: In this topic, there are authors who affirm that the clientele belongs to the franchisee, because it is he who acquires it and keeps it satisfied with his work. On the other hand, there are those who say that the clientele belongs to the franchisor,Since the latter is the owner of the brand. Breaking the contract and compensation: If the contract is terminated unilaterally and without just cause, the injured party can claim compensation. When a fault has been committed by the franchisee, the other party may terminate the contract and request compensation.
6. BIBLIOGRAPHY
- BIBLIOTHECA MILLENNIO, Commercial distribution law, El Navegante Editores, Santa Fe de Bogotá, 1995. HILL CHARLES AND JONES GARETH, Strategic administration «an integrated approach», Editorial Mc Graw Hill, Santa Fe de Bogotá, 1996MATIAS ALEMAN MARCO, Subregional regulations on product and service brands, Top Management International. Legis Trade Code.
