What is a commercial franchise? What are the notes when receiving a franchise?

Commercial franchise is a business activity wherein the franchisee leverages the established reputation of a brand to provide goods or services. Simultaneously, the franchisor has the opportunity to expand the brand, scale up operations, and increase revenue. However, the procedures for franchising are still not clearly defined, leading to potential risks for both parties involved. The following article outlines key considerations for both the franchisor and the franchisee to be aware of.

The notes when receiving a Commercial franchise

Concept of the commercial franchise

Commercial franchise means a commercial activity whereby franchisors permit and require franchisees to undertake by themselves to purchase or sell goods or provide services on the following conditions specified by law.The specific conditions are as follows:

• The purchase or sale of goods or provision of services shall be conducted in accordance with methods of business organization prescribed by franchisors and associated with the franchisors’ trademarks, trade names, business know-how, business slogans, business logos and advertisements.
• Franchisors shall be entitled to supervise and assist franchisees in conducting their business activities.

Based on the provisions of Article 284 of the Law Commercial 2005, as amended and supplemented in 2019,

Characteristics of commercial franchise

There are several characteristics that distinguish franchise activities from other commercial activities. These are factors that help business owners consider and choose franchise activities in their business strategies. Some of the core characteristics include:

Firstly, regarding the participating entities: Franchise agreements are established by independent entities, including the franchisor and one or more franchises. The parties to the franchise agreement can be individuals or legal entities, either citizens or foreigners.

Secondly, the subject of commercial franchise is commercial rights.

Thirdly, concerning the purpose of commercial franchise:

• For the franchisee: they are permitted to use the franchisor’s brand, logo, and services for business operations. This saves time and costs in building a new business system and competing with established brands.
• For the franchisor: they receive passive fees from franchise activities; expand their market; increase revenue sources; utilize resources and expenses; enhance brand recognition, etc.

Fourthly, commercial franchises involve long-term and coordinated cooperation. During the cooperation period, the franchisor is responsible for providing documents, training employees, technical support, as well as inspection, supervision, and compliance requirements for the franchisee. Compared to the independent nature of participating entities, the non-contradictory and coexisting nature creates the distinctive feature of franchise activities.

Characteristics of commercial franchise

Conditions for commercial franchise:

Since January 15, 2018, the law no longer imposes conditions on the franchisor when participating in franchise activities (see Article 9 of Decree No. 08/2018/NĐ-CP dated January 15, 2018, of the Government). For the franchisor, a trader is licensed with commercial rights when the franchising system has been operating for at least one year. This is based on Article 5 of Decree No. 35/2006/NĐ-CP dated March 31, 2006, of the Government detailing the Law Commercial regarding franchise activities.

Considerations when accepting a franchise:

• Carefully consider brand valuation: Businesses must assess and select strategic suppliers. Every franchising business has trade secrets, which are core differentiators from competitors. Therefore, selecting a strategic supplier requires businesses to examine and evaluate the supply chain, standards, and quality of the supplier.
• Establish a franchise agreement: The franchise agreement records the agreement of the parties regarding franchise rights and serves as a basis for determining the rights and obligations of the parties when conducting franchise activities. It also serves as a basis for resolving disputes during the franchise process. Therefore, the parties need to agree and carefully consider when building and signing a franchise agreement, ensuring that the contract complies with legal regulations to best protect the rights and interests of the parties in the transaction.
• When participating in a commercial franchise, parties need to comply with and complete the procedures for registering franchise activities with the competent state authorities and fulfill necessary financial obligations as required by regulations.
• Additionally, franchisors and franchisees need to build and maintain good relationships based on mutually beneficial business cooperation to facilitate the franchise process and future business production activities.

Commercial Franchise Consultancy Services:

With a team of experienced experts in franchise consultancy, Long Phan will support customers with the following issues:

• Consultation on franchise conditions
• Advising on the rights and obligations of the parties in franchise activities
• Consultation on franchise negotiation
• Consultation, review of franchise agreements; termination of franchise agreements
• Consultation, assistance in implementing franchise registration
• Consultation on resolving franchise disputes

Franchise Consultancy Services

The above article has provided some information on franchise activities as well as some notable considerations. Parties involved should be aware of the regulations regarding franchise activities to best protect their interests. If you have any need for franchise consultancy support, please contact us immediately at Hotline 0906.735.386 so that Long Phan’s team of expert consultants can provide the best advice and assistance. Thank you.