Franchise is an agreement in which one person (the franchisor) has developed a system to operate a specific business and allows others (the franchisees) to use that system as per the franchisor’s terms, in exchange for which the franchisor receives compensation from the franchisees. This relationship continues to exist as long as the franchisee operates in accordance with the standards and practices established by the franchisor and receives ongoing assistance and support from the franchisor.
Therefore, franchising involves a system that the franchisee is permitted to use, often referred to as the franchise system. This comprehensive system includes intellectual property rights related to one or more trademarks, trade names, industrial designs, patents, or copyrighted works, along with technical know-how and related trade secrets, to be used in selling products or providing services to customers. Additionally, the franchise system may encompass various other elements crucial to the success of a business, such as meal preparation recipes and methods, employee uniforms, restaurant architecture, packaging design, and management and auditing systems.
The fundamental characteristics of a franchise relationship include:
- Use of the System: In exchange for agreed-upon payments, the franchisee is allowed to operate using the franchisor’s established system. The franchise system is typically utilized at specific locations, such as franchisee-owned restaurants or stores, which are commonly referred to as “franchise units.”
- Ongoing Interaction: The relationship continues, involving the sale of franchised products (or provision of franchised services) for a specified period. The franchisor continues to support the franchisee in establishing, maintaining, and growing the franchise unit. In return, the franchisee typically pays fees to the franchisor for the use of the franchise system and may also compensate the franchisor for ongoing management services.
- Compliance with Operating Guidelines: The franchisee agrees to abide by guidelines on how to operate the franchise system established by the franchisor. These guidelines may encompass quality control, system protection, territorial limitations, operational details, and other provisions designed to control the franchisee’s operations within the franchise system.
Ownership of trademarks is often a central condition in franchise agreements. In franchise agreements, the franchisor usually retains a higher level of control over trademark usage compared to standard trademark licensing agreements.
