Commercial concession and franchising agreements

Managing any business means drafting, changing, analyzing, as well as many other aspects of dealing with contracts. It is impossible to imagine conducting any business without concluding contracts. Therefore, it is important for every entrepreneur to understand what contractual models and constructions one can use in a given situation for the high-quality and effective business development.

One of such contractual models is a franchising agreement – an agreement according to which the person who owns the exclusive rights – the franchisor, authorizes another person – the franchisee to use such exclusive rights to develop the franchisee’s business. In turn, the franchisee pays remuneration for the use of such rights.

What should be in a franchise agreement?

When people talk about a franchising agreement, the terms “franchise packaging” or “to pack franchise” are often used. This is not about a particularly colorful envelope, in which the parties send each other an agreement for signing, but about the mechanism of working under a franchise agreement.

A franchise agreement has to contain the terms regarding the following:

  • Description of the franchisor’s exclusive rights which are subject-matter of the agreement;
  • Exhaustive list of the franchisee’s obligations regarding the use of the franchisor’s rights under the agreement;
  • Franchisor’s obligations on assisting the franchisee during the term of the agreement;
  • Responsibilities, limitations and liabilities of the parties;
  • Franchise payment terms and schedule;
  • Provisions regarding negotiations and dispute resolution etc.

The terms specified hereinabove are only the most essential ones, the franchise agreement shall also include provisions regarding the intellectual property, confidentiality obligations etc. A well-prepared franchise agreement has to reflect that the franchisor sells a ready-made business model, proven and effective business solutions to the franchisee and the franchisee is obliged to strictly and closely follow the instructions received from the franchisor.

What are the legal requirements for a franchise?

Legal requirements for franchise commerce agreement may vary depending on the jurisdiction. For example, there are the following legal requirements for franchise agreement in Ukraine:

  • commercial franchise has to be concluded in writing;
  • subfranchising is prohibited unless otherwise is provided in the agreement;
  • franchisee shall not compete with franchisor within the particular territory/jurisdiction specified in the agreement;
  • franchisee must not obtain franchise from the franchisor’s competitors etc.
  • subject-matter of the franchise commerce agreement in Ukraine is the intellectual property objects, franchisor’s commercial experience and business reputation.

How do you negotiate a franchise agreement?

Conclusion of the commercial franchise agreement may require conducting the negotiations with the counterparty. The main goal of such negotiations is to agree upon all of your points and do not consent to any offers which contain the legal risks for you.

In particular cases it is possible to vacate some of your less important points to agree upon the high-priority terms. For example, you may consent to the counterparty’s requirements regarding the confidentiality regime to get the better payment option. Herewith, you should keep in mind that both franchisee and franchisor usually are interested in finishing negotiations as promptly as possible.

Franchise agreement is a win-win relationship scheme for both parties: the franchisee gets the opportunity to develop its business more efficiently under a recognizable brand, and the franchisor gets a profit and a free opportunity to further develop the brand.

Difference between franchise and concession

There is always a question about difference between franchise and concession. What does a commercial concession agreement have to do with it? A commercial concession in business is a type of agreement stipulated in the Civil Code of Ukraine instead of franchise agreement. Law provisions, however, do not create any significant difference between franchise and concession – in Ukraine, a commercial concession in business is an analogue of a franchise agreement.

Thus, concession vs franchise is not applicable in this case.

Why is it necessary to consult with a lawyer before signing any franchise agreements?

VigoLex team has significant experience and high-quality legal expertise in the matters of legal support for franchising and commercial concession transactions.

It is better to always consult with lawyers regarding your franchise agreement: law in particular jurisdiction may introduce essential specifics in this regard. 

VigoLex lawyers will point out:

  • what risks are included in the franchise/concession agreement for each party;
  • how to “pack”, that is, legally register the franchise;
  • what rights, obligations and guarantees are best specified in the franchise or commercial concession agreement and why;
  • analysis of concession vs franchise agreements;
  • to what pay attention when drawing up the franchise or commercial concession agreement, etc.

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    A commercial concession agreement is an agreement whereby the owner of intellectual property rights, business experience, or business reputation grants another person, for a fee, the right to use those assets to conduct that person’s own business.

    Under a commercial concession agreement, a company pays for the right to use another company brand to conduct its own business.

    A franchise agreement is a form of contractual relationship similar to a commercial concession: the franchisee buys the right to develop its business at the expense of a well-known brand, and the franchisor in this way contributes to the development of its own brand.

    The essence of franchising is as follows: the franchisee pays a fixed amount or recurring payments for the right to use another company brand. In turn, the franchisor which sells the right to use its own brand gets the opportunity, at the expense of the franchisee, to increase the level of brand awareness and trust.

    The franchise package must include the franchise agreement itself and its annexes, which would contain a description and algorithm of actions and implementation of a ready-made business model, as well as proven and effective business solutions for business development using the franchisor’s brand.

    The more detailed the franchise conditions are fixed, the less chances that there will be a misunderstanding between the franchisor and the franchisee.

    A franchisor is a company or individual who grants other persons/companies the right to use its brand, intellectual property rights, commercial experience and business reputation to grow their business.

    Franchising is a type of contractual or business relationship between companies, while a franchise is a set of brand characteristics (intellectual property rights, business reputation, etc.) that a franchisor allows its franchisees to use.

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