What is franchising

Franchising is a way of developing a business based on the “leasing” of a trademark. In legal terms, franchising is a method of complex licensing, when along with a trademark (or commercial designation), the user is also presented with a license for a complex of know-how.

Instruction manual

1

In franchising relationships, two parties are distinguished: the franchisor - the one who provides the trademark for use, and the franchisee - the one who will use it (the buyer of the license). The franchisee, according to the general rules for licensing intellectual property, pays the franchisor the amount of money agreed upon in the agreement at a time, and also - regularly - royalties, or royalties for the use of the trademark or commercial designation.

2

However, there are two fundamental differences between franchising and “ordinary” intellectual property licensing. The first is that the franchisee is obliged to use the trademark in a manner strictly prescribed by the franchisor. Second - royalties are paid to the franchisor, regardless of the results of the franchisee. Consider these differences in more detail.

3

As a rule, a franchise scheme (franchise) is used to build the so-called "sales networks" of products manufactured under a trademark or commercial designation. In this scheme, the franchisor is the manufacturer of the product (most often), and the franchisee is the seller. The difference from the “usual” trade agreements is that the franchisor obliges the franchisee not only to sell the goods, but also to use the methods of advertising, marketing, reporting, etc. developed by him, that is, techniques and know-how, which make up the so-called "business system".

4

When working under a franchise license, the franchisee (seller), as a rule, agrees to regularly purchase from the manufacturer (franchisor) certain volumes of the product for subsequent sale. In this case, the franchisee does not have the right to set their own retail prices for the product - but only in the price range determined by the franchisor. As a rule, the franchisor determines the norms of sales volume in the agreement, and also, in the case when the franchisee exceeds the standards, the bonus system. It should be noted that royalties - regular payments to the franchisor - are not a "percentage of the intermediary", they are payments for the use of intellectual property (in this case, the know-how complex).