Franchise Agreement

The franchise agreement is an atypical contract, which until recently was not expressly regulated by the law. Of American origin, recently it has become increasingly important in the Italian market in the production sector, patents or other knowledge (know-how) as the franchise gradually is proving itself as a type of entrepreneurial success.

The contracts used in our country by franchisors do not show significant differences, allowing, in some measure, their approval for macro areas related to the distribution of goods and provision of services.

 

The franchise agreement in detail

The franchise agreement can be defined as an atypical contract with fees loaned for a period, whereby the franchisor (licensor or franchisor) grants another entrepreneur (franchisee or affiliate), the right to sell its own products by using the franchisor’s brand and its distinctive signs or a patent, know-how and its support upon entering a contract, paying a fixed periodic amount (entry fee or minimum amount) whereby the entrepreneur enters the chain and pays an additional fee proportional to the volume of business (royalty).

The obligations of the parties

The contract provides a number of obligations for both franchisor and franchisee

The franchisor in broad terms has the following obligations:

  • Transfer of license to the franchisee for the use of its commercial formula, including the right to use the know-how and the distinctive signs of the franchisor (logo, sign and graphic material);
  • Training of the franchisee or its personnel;
  • Technical and administrative assistance;
  • The Franchisee’s obligations are;
  • Adjustment to the franchisor’s quality standards;
  • Obligation of secrecy;
  • Payment of fees, if any;
  • Obligation to use the distinguishing marks of the franchisor within the limits of the license granted in the franchise agreement.

What should be explicitly stated in the franchise agreement?

In drafting or signing a franchise agreement, especially if it deals with the services sector, attention must be paid to the following items for the success of the Agreement and to avoid future “disputes” between the parties.

Defining the scope and extension of the exclusivity clause.

Through this clause, each affiliate is assigned a specific and exclusive territory.

The franchisee is bound not to sell goods or provide services in competition with those of the franchisor. In turn the franchisor or other affiliates are bound not to sell goods and provide services in the area of franchisee’s assigned territorial jurisdiction.

This point should be carefully checked in the franchise agreement, as the exclusivity clause “is not a natural effect of the agreement, and must be provided by the parties (as indicated by a famous ruling dated 02/09/1990 by the Court of Lecce.)

Duration of the contract in franchise

There is no maximum duration set in the franchise agreement, which might be concluded either indefinitely (by indicating in the contract the procedures and powers for withdrawal of both the parties) or fixed term (in this case the parties must regulate the renewal option of the agreement) The franchisee should also consider whether the duration of the contract allows obtaining amortization for some expenses (according to Art. 3, paragraph 3 of Law 129/2004).

When we speak about the commercial contract being defined, we are speaking about the transfer of know–how from the franchisor to the franchisee. In signing the franchise agreement it is crucial to clearly define what is meant by the term “know-how” or, in any case, what actually will be transferred from the franchisor to the franchisee.

In the case of franchised stores (such as clothing, accessories, household items and so on) there are no particular problems: together with the use of the brand and the rest, the franchisor sells exclusively its own products. In the case of services (such as in restaurants or private postal agencies) the transfer can refer both to tangible items (e.g., special equipment such as fryers) and to intangibles, primary of which is “know-how” “for example, a particular processing procedure).

In each of the previous three cases it is good to determine in detail “what” the franchisor will transfer to the franchisee and also define the extent of assistance that the affiliate is committed to giving during the period of the franchise agreement.

In any case, one can ask for expert advice from an accountant or an industry expert to assess the terms of the agreement. Soluzioni offers advice from its experts both to franchisors- who wish to evaluate the compliance of the contract to potential franchisees- and to those who are about to enter into a franchise contract as an affiliate and want to clarify more aspects.

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