Franchise Contract: everything you need to know before creating your business
The so-called franchise agreements can be a viable option to start a business, as long as we know its risks and characteristics
One of the ways to obtain legal residence in Spain is through a work permit on your own, that is, doing an independent business or professional activity, which can be done autonomously or through a franchise agreement.
What is a franchise contract
A franchise contract is basically that mediane which a certain company, called franchisor, gives to another, called franchise, the following elements related to the operation of a business:
a) The use of a common denomination or label or other rights of intellectual or industrial property and a uniform presentation of the premises or means of transport object of the contract.
b) Communication by the franchisor to the franchisee of technical knowledge or know-how, which must be its own, substantial and unique, and
c) The benefit continues for the franchisor to the franchisee of a commercial or technical assistance or both during the term of the agreement; all without prejudice to the supervisory powers that may be established contractually.
Obligations of the franchise
In exchange, in the franchise agreement the franchisee is obliged to pay the franchisor an economic consideration, which can be the so-called entry fee, or a monthly payment (fixed or percentage on sales, income, etc.), or a combination of both of them.
The franchise agreement is regulated in Spain in concrete form by both Article 62 of the Retail Law, and by Royal Decree 201/2010.
In addition, the franchise agreement usually regulates other aspects, such as the geographic scope to which the franchise applies (if there is a certain right of exclusivity in favor of the franchisee), what happens when the contract ends (obligations of non-competition on the part of the franchisee). franchisee, for example), and so on.
Advice when choosing a franchise
Establishing a business through a franchise contract is not, in itself, a guarantee of success. This depends on many factors. Recall that in the late 90’s began a real boom in franchises in Spain. However, a significant number of them failed after a while. Our experience is that we must evaluate the following aspects:
a) The experience and solidity of the franchisor
It must be a solid company, with years of operation with its own businesses and with a good reputation. Not only that it has been successful with its own businesses, but that it has several years performing functions as a franchisor proper. It is one thing to direct your own establishments and quite another to have the capacity, time, resources and interest to transmit the knowledge to the franchisee and advise constantly and permanently.
b) The degree of satisfaction of the franchisees
We do not recommend entering into a franchise agreement if you have not previously spoken with one or several franchisees, about how satisfied they are with the support provided, the economic projections and business plan that was offered, the ease or not to comply with the economic obligations with the franchisor, etcetera.
c) The conditions of the contract
It is important that you review with a financial advisor and a lawyer, all the conditions of the contract (both the payments that you will have to make, how they will provide you with the know how, the penalties in case of termination, etc.), and that you can compare them with other similar franchises.
It is also essential that you can negotiate some with the franchisor. A situation of “take it or leave it” creates doubts as to the attitude of the franchisor, unless it is a super-recognized and successful franchise.
d) The activity sector
At different times, each sector of the economy has a particular development. Thus, for example, the real estate agencies were very successful during the construction boom, but today they are still in the doldrums.
On the contrary, new activities linked to services seem to have good prospects.
It is essential that you analyze what type of activity has more output these days, and if you also have some type of experience in them, then much better.
e) Location, location, location
Although it seems a commonplace, regardless of whether you decide to establish a business autonomously or with the help of a franchise contract, the real estate gold rule is still valid. In effect, the location of the premises will continue to be one of the essential aspects for you to succeed or not.