Franchise (Gouache Avocats)

Defining the franchise presupposes first describing the franchise as an economic system, before giving a legal definition.

Gouache Avocats recalls that franchising is a contractual system that allows an entrepreneur to reproduce the success of another entrepreneur who had an original idea and exploited it by developing a know-how of his own, by having this know-how transmitted to him and by using the signs of rallying the clientele.

The basis of any franchise is therefore the existence of know-how. The know-how covers the concept of the Franchisor: a business idea and its implementation in a point of sale. It is therefore a trader’s skill, but one that goes beyond what the man skilled in the art usually masters; know-how compiles, in a new recipe, ingredients most often known to competitors.

The concept must be formalized: the trader who aspires to develop into a franchise must therefore standardize it. This involves the drafting of a written document in which the concept is presented, the know-how ordered and described precisely. This document will become the franchisor’s operating manual (or bible), which it will give to the franchisee to ensure the replication of the concept in the franchisee’s point of sale after having trained the franchisee in its methods.

The concept must then be tested. If the opening of pilot points of sale is not a prerequisite required by law and case law, it is obvious that a reiteration presupposes the existence of a precedent: since the franchise makes it possible to reproduce an entrepreneurial success, the know-how must have been approved in one or more pilot points of sale.

The pilot (s) must have enabled the validation of the concept: at the operational level and at the profitability level. A concept whose profitability is insufficient will not allow the franchisor to levy entry fees, operating and communication fees and build a solid network. It would then open the way to dissent and litigation.

For the franchisee, know-how must be an efficient way to penetrate the market and win over customers. It must have a competitive advantage and allow it to have resources that it could not have obtained alone, by experimentation only after a long period of research and development and heavy investments.

Validated and formalised, the concept will be sold. The franchise agreement will allow the franchisor to benefit from the effects of substantial levers allowing it to develop:

• financial leverage, due to the capitalisation of its business by the only franchisee who pays an entry fee covering all the development costs of the franchise brand, in addition to a margin;
• human leverage, by the strong involvement of the franchisee in the operation of his business, generating results most often superior to those obtained by branch employees, and by the reporting of field information and the involvement of the franchisee in the network to update the know-how and make it evolve according to the competitive context;
• marketing leverage, through the combination of the brand’s rapid presence in its reference market, a factor of visibility and notoriety, and through local and national communications actions.

Franchising is thus a rapid lever for the development of a concept, a brand, including the sharing of costs and financial risks.

This sale of the idea involves serious initial training of the franchisee: the know-how is complex. It differs from the simple rules of the art that any trader is able to acquire by his own means. Its transmission therefore involves a training period, upon signature of the franchise agreement, which allows the franchisee to master it sufficiently to be able to apply it in its point of sale. Then, constantly, the franchisor will have to check its correct application and make the necessary corrections by its assistance, thus training the franchisee permanently.

Part of the concept consists in the organization of the franchisor: it is part of the know-how that can be qualified as know-how. It includes development procedures, network animation and services rendered to franchisees. Determining the quality of the network, this know-how is never transferred to the franchisee. It must be the subject of constant attention and protection by the franchisor.

The provision of know-how around the reputation of the brand to many franchisees will allow the creation of a network operated under the same brand, within which the commercial offer and the level of service will be relatively homogeneous, due to the application of common standards.

The duplication of the concept on a territory, a market, will constitute a network of operators using uniformly the same standards, under the same banner.

To the extent that franchising is the reiteration of a successful business concept, its economic scope is broad. It can be applied in all economic activities, whether service, commercial or industrial.

Today, franchising is used in most sectors of the economy.

Originally applied to the distribution of products and first in ready-to-wear, it has acquired its notoriety there. The franchisor has in this system of products, most often under its own brand, which it distributes, most often exclusively, in its franchised points of sale. This is called a distribution franchise.

One form of distribution franchise is the franchise-corner (or stand franchise) that is found mainly in shopping malls and department stores: a small and open sales area, under the franchisor’s brand, is operated in a large point of sale with many stands or stores and having its own brand.

The franchise then invested in the services sector: hairdressing, beauty, real estate agencies, catering, hospitality. The service franchise is based on an original service method; it may include the supply of exclusive products. It is currently experiencing a new and considerable boom in the development of personal services: household, school support, childcare, maintenance, etc.

The deductible is also applied to the industry. It is therefore an interesting technology transfer tool. This form of franchise is less known but is nevertheless practiced regularly.

Finally, the financial franchise offers an alternative route to private capital investments, as investors are relieved of the management of their operations: this form of franchise is developed mainly in the hotel and restaurant industry.

These forms of franchise can be adapted to the master franchise. The master franchise allows you to export your concept, to adapt it to a foreign culture, by relying on local investors who can sub-franchise the concept locally.

These forms of franchising can be coupled with various methods of organisation: backing the management lease, acquisition of the franchisor’s stake in the franchisee’s capital, etc.

There is no legal definition of deductible. A definition is nevertheless provided by the European Franchise Code, a reference text, but which does not have the force of law:

Franchising is “a system of marketing products and/or services and/or technologies, based on close and continuous collaboration between the Franchisor and its franchisees, legally and financially distinct and independent businesses, in which the Franchisor grants to its franchisees the right, and imposes, the obligation to operate a business in accordance with the Franchisor’s concept. The right thus granted obliges the franchisee, in exchange for a direct or indirect financial contribution to use the brand and/or the brand, the know-how, and other intellectual property rights of the franchisor, supported by the continuous provision of commercial and/or technical assistance, within the framework and for the duration of a written franchise agreement, concluded between the parties for this purpose “.

The French franchise law is limited to the provisions relating to the information due by the franchisor to the franchise candidate before the signature of the contract (Doubin law, codified in Article L. 330-3 of the Commercial Code and its implementing decree).

Franchise law

is therefore a transversal law: it is based on the combined application of rules drawn from the different corpora making up business law and in particular:

• contract law;
• commercial law;
• company law;
• competition law;
• intellectual property law;
• economic law.

The basic principle is that the franchise contract obeys the contractual freedom and the autonomy of the will of the parties. This principle is framed by mandatory legal provisions drawn from several branches of law.

Franchise law

has in fact been built in courtrooms: the rules setting the legal regime of the franchise contract are jurisprudential. They are now quite consistent and a judicial regime of the franchise contract has emerged over time.

Focus: The European Code of Ethics for Franchising

Entered into force on 1 January 1992, this code was originally French designed at the initiative of the French Franchise Federation. It is a text of six articles specifying the general guidelines of conduct that any Franchisor should adopt. It recalls the main principles of the formula after having defined it and has not changed since its adoption. This text does not have the force of law, unless the parties expressly intend to refer to it in the contract. A ministerial response No.14618 OJ AN Q of 9 March 1987 confirmed this point. It is therefore not part of the rules imposed on the franchisor, unless the latter voluntarily submits to them.

Once these clarifications have been made, we propose to review the main clauses of a franchise agreement. There is no standard franchise agreement. Each contract is the result of an engineering specific to the franchisor, set up with the help of its counsel and taking into account the characteristics of its know-how, its business strategy, its culture, etc. The firm, on the other hand, has methods of constructing franchise contracts based on questionnaires reviewing the completeness of the usual clauses of a franchise contract and specifying to the franchisor the options available to him. On this basis, a phase of collaboration begins in which his answers and options are explained and discussed, resulting in the drafting of a contract. This project is then the subject of round trips between franchisor and lawyer until a contract adapted to the network is obtained.

Any franchise agreement, on the other hand, contains at least the following clauses:

financial

• clauses;
• clauses relating to the transmission and use of know-how;
• clauses relating to the duration, renewal and transmission of the contract;
• clauses organising exclusives.

Financial clauses include:

• the definition of the entry fee (or initial flat fee) which pays in principle for the provision of the brand, the transmission of know-how, the initial assistance (See definition in the Glossary section). Its amount is generally lump sum;
• the accuracy of the possible collection of a new entry fee (possibly reduced) at the time of the renewal of the contract;
• the terms and level of the permanent royalties that are the counterpart of the assistance and permanent services offered by the franchisor, as well as in the right to use the brand and sign. They are in principle proportional to the turnover achieved by the franchisee, with, where applicable, a flat monthly fee;
• the level of local and national marketing fees;
• other clauses that may involve financial commitments of the franchisee, such as the obligation to comply with the concept of the store during the performance of the contract or personal guarantees intended to guarantee the payment of the franchisor.

The clauses relating to the transmission and control of know-how include:

• the description of the initial training and assistance (work and layout of the point of sale, preparation for the opening, etc.);
• description of ongoing training and assistance;
• the conditions of implementation of the concept by the franchisee;
• the procedures for monitoring the application of the franchisee’s concept and activity by the franchisor.

The clauses relating to the duration and end of the contract are important.

The duration must be sufficient to allow the full amortization of the operator’s initial investments and thus allow a fair return on investment. The renewal is freely organised and the tacit renewal clauses are alongside those which provide for a contract renewal procedure involving positive actions by each of the two parties. In the event of non-renewal as in the event of termination of the contract, clauses specify the obligation of the franchisee to cease the use of any distinctive sign, the possible purchase of its business, goods and arrangements by the franchisor, the obligations of confidentiality and non-competition. Priority rights and pre-emption clauses are organised in the event of a transfer of the franchisee company, and if they are not exercised, clauses for the approval of the buyer are stipulated.

Finally, franchise agreements include clauses organizing exclusives and which often carry restrictions of competition: exclusive supply clause, territorial exclusivity clause, non-compete clause and non-affiliation clause.