What the franchisee risks Photo: iStock
25.10.2013 8713

What the franchisee risks

Do you think that under the wing of a franchisor everything is simple and reliable? But no, ”said Vladimir Fokin, a senior attorney and managing partner at Fokin & Partners. Vladimir recommends that franchisees not relax, because even in an already established business, a younger partner at every step risks losing everything and even more. What risks does the franchisee take when signing a commercial concession agreement?
Fokin Vladimir.jpg Vladimir Fokin, Founder and Managing Partner, Law Firm Fokin & Partners. A lawyer with over 15 years of experience. PhD in Law. Expert in tax planning, legal security of business and other legal aspects of entrepreneurship.

Commercial risk

Commercial risk arises from the moment the franchisee signs a commercial concession agreement and begins to develop a point of sale. The bottom line is that even with signed papers, the junior partner is insured against termination of the contract at the initiative of the franchisor and loss of business. There were times when a franchisee company, making sure that the franchisee's business is doing very well, under a plausible pretext, broke off the contract and entered the city on its own. In order to minimize this commercial risk, firstly, pay especially close attention to the terms of the contract and in particular the rights to rent the premises of this outlet. The chances of losing a business increase significantly if the rental of premises is short-term and does not exceed 11 months. It is best to conclude a long-term lease, or, of course, be the owner of the premises.

Secondly, strive to acquire exclusive franchise rights, as this prevents the appearance of competitive stores in your city, which are often opened by the franchisor itself. Thirdly, make sure there is an easy way out of the business. Subscribing to a franchise is not difficult, but are you sure that exiting it will also be easy? Before concluding the contract, pay attention to the terms of the contract termination, because some franchisors work on the principle of “free entry - paid exit”, providing the younger partner at the launch stage with everything from shelving to advertising, and requiring substantial compensation in case of cancellation of the contract at the initiative of the franchisee.

Contractual risk

This type of risk is especially relevant for those who acquire a franchise based on off-the-shelf business technology. In the event of a technology violation, the commercial concession agreement is terminated, and all the money, time and effort of the franchisee is wasted. It is impossible to completely get rid of this risk, but it can be minimized. Carefully study the terms of the franchise and write down everything that cannot be done in any case. Train the staff and train the staff so that it never occurred to them to engage in amateur performances. Fix all prohibitions in the charter, job descriptions, labor contracts and other internal documents. This is necessary to prevent violations under the contract of commercial concession and in order to be able to punish the guilty workers within the legal framework.

The second subspecies of contractual risk is that the franchisee may violate other conditions of partnership, which, however, are not spelled out in the contract of commercial concession. Many of the limitations of contractual relations and their consequences are fixed in the Civil Code and “blurred” by it and the judicial practice in fragments, therefore it is simply impossible to take into account all the points for a busy businessman. It is better to turn to a lawyer who can tell about all the pitfalls of the relationship between the franchisee and the franchisor.

To prevent the franchisor from making unwarranted accusations, collect all the positive evidence of your faithful adherence to technology - documents, requests for information and reports. Most commercial firms are too lazy to do this and, as a result, “fall” to fines and even business loss. Also convince the franchisor to write in the concession agreement a clause on how you will communicate with your senior partner, and indicate in it specific addresses, phone numbers and email addresses. In case of conflict, it will help you out.

Corporate risk

We are talking about the risk that the franchisee assumes, organizing a company and hiring employees. This risk can be divided into two subspecies, each of which requires action.

First of all, think about the threats associated with the form of business. If you acquire a franchise as an individual entrepreneur, take care of the marriage contract, otherwise in the most sad case you will lose not only corporate, but also your own property, leaving your family without a livelihood. If the franchise is acquired by a company such as LLC or ZAO, make sure that the decision of the board, board of directors, shareholders on the acquisition of the franchise is positive and correctly executed. This is necessary in order to exclude the so-called indirect claims from shareholders, as a result of which they can challenge the transaction "in the interests of the company."

Finally, do not forget about the threat to the business from the side of the employees to whom you expose it, trusting the personnel with franchise technology and other trade secrets. To get rid of this risk also does not work, unless you know how to work in complete solitude. To minimize this risk, write down all franchise requirements in all possible documents of the company, starting from the charter and ending with the provision on working with customers. In this case, you get the strength of the labor contract and will be able to prosecute the guilty employee, which would be much more difficult if you had only the Labor Code at your disposal. It’s clear that it’s not very effective to wave fists after a fight, so if you want to stop violations in the bud, carefully monitor everything that happens in your store and, with the help of programmers, try to “sew” the correct sequence of actions into computer programs for managing trade. Do not disdain the principle of “need-to-know” when organizing employees' access to the company's commercial information, everyone should know only what he is entitled to and no one except you should see the whole “picture”.


Intellectual risk

Before concluding a commercial concession agreement, it would not hurt to check the franchisor’s trademark and trademark for uniqueness and absence of disputes, not only in Russia but also in other countries. This can be done in the state register of Rospatent, in which the intellectual rights of the company are registered - including by franchise - and elements of trade identity. From a legal point of view, all materials provided by the franchisor should also be “clean” - advertising texts, background music, illustrations. Ask the franchisor to fix the existence of intellectual property rights in the contract and fix the following guarantees: the franchisor guarantees that all intellectual property or copyright objects are created without violating the rights of third parties; all rights that are transferred to the franchisee really belong to the franchisor; if intellectual property claims are brought against the franchisee, the franchisor agrees to indemnify all losses to the franchisee.

Should I take a risk?

A logical question arises: what should I do if, in the course of studying the contract, the franchisee identified completely obvious risks? In a number of cases, he has no choice but to recognize these risks and agree to them, but in some situations (such as, for example, with dubious intellectual property rights), one can do otherwise. Firstly, you can convince the franchisor to change the terms of the contract, which will be more profitable for him than losing a partner. Secondly, you can pretend that these risks are unknown to you, and after signing the contract, point to them, aleatherg them to lower licensing fees. Remember that you, as a franchisee, have the right to terminate the concession agreement and receive compensation if the senior partner has not informed you about all the terms of the franchise. True, this manipulative lever is more suitable for those who, even in the franchising business, are guided by the principle of “trust, but verify”. But is it worth starting a business relationship with such a tricky move? Fokin & Partners Law Firm exists in Russia since 2003 and provides services in the field of corporate, tax law, real estate transactions and intellectual property.


Additional materials on the topic:

The book "Franchising from A to Z", written by Vladimir Fokin in collaboration with well-known businessmen. Phoenix Publishing House, 2013

What can replace a franchise? Vladimir Fokin gives the answer to this question in his author’s video against the backdrop of Venetian landscapes: http://link.ac/2hRD6

Do you think that under the wing of a franchisor everything is simple and reliable? But no, ”said Vladimir Fokin, a senior attorney and managing partner at Fokin & Partners. Vladimir recommends a franchisee ...
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