Starting a new business is a risky venture that requires money, knowledge and time. Whether you are a serial entrepreneur or want to start something of your own for the first time, franchising can be a good option and gives you all the prerequisites for faster development and greater chances of success. In the following lines you will find out what this business model actually is and what legal risks it poses.

1. What is franchising?

Franchising is a unique form of distribution of goods and services where one party – the Franchisor – grants another party – the Franchisee – the right to use its trademark and business model in a particular business area under certain conditions and for a fee.

Franchising and franchise agreements are not explicitly regulated by law in Bulgaria, however various forms of franchising have evolved in response to different market needs. The basic division of franchising is as follows:

• Product;
• Distribution; and
• Service.

Product franchising provides the Franchisee with the opportunity to manufacture specific goods using the Franchisor’s manufacturing experience and know-how. In distribution franchising it is characteristic that the Franchisee is given the opportunity to distribute the goods or services produced or provided by the Franchisor. In service franchising, the Franchisee is entitled to provide the services normally offered by the Franchisor but in accordance with the Franchisor’s “rules” – the manner in which the services are offered, interaction with customers and suppliers, etc.

2. Benefits of concluding a franchise agreement

Franchising combines the advantages of the Franchisor’s established business model with risk-sharing with the retailer, ensuring a consistent quality of products and services. In addition to the ready-made business model, franchising provides several other benefits such as centralised marketing, training, easier access to financing, and lucrative prospects for selling the business already developed.

3. Legal aspects to be considered

Any entrepreneur considering franchising should be aware of a number of key legal aspects that are present in all franchise agreements:

• Subject matter of the agreement – a detailed description of what the Franchisor’s obligations are and what the Franchisee receives;
• Financial terms – usually in this type of relationship there is an initial fee for obtaining the business model and in addition – regular payments according to the Franchisee’s turnover. There are also often financial targets to be achieved over a set period of time;
• Term of the contract and conditions for its renewal;
• Confidentiality clause and protection of intellectual property rights;
• Clause on restrictions on carrying out competitive activities or attracting partners, suppliers and employees;
• Franchisor’s buyout clauses or potential restrictions on sale to third parties; and
• Early termination provisions, and others depending on the type of franchise and the particulars of the business model.

This non-exhaustive list illustrates the many specifics that should be considered before signing a franchise agreement.

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