How to write a franchise contract? Pay attention to 3 major problems, do not step on thunder when starting a business

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How to join a business without losing money? Regardless of whether you are an enterprise that wants to open up franchise and investment promotion, or an individual owner who wants to join the brand system, you must be cautious and cautious when signing a franchise contract and negotiating franchise conditions. For the comparison of various franchise types, the 7 must-knows and 3 common legal issues in the franchise contract, please refer to this article.

Know to join

Franchising is a highly efficient business model. The business headquarters provides authorization and guidance to allow individual operators to join chain stores operating the same brand. The advantage of joining is that it can make use of the brand's existing reputation and business policy, so that individual operators do not have to start from scratch when opening a store, reducing the cost of self-employment and learning.

Taiwan's famous franchise chain business system includes "Bafang Yunji", "Wu Tao Chi Shang Bento", "Don't Scream at Me" and so on.

At the legal level, the franchise relationship is clearly defined in the "Fair Trade Commission's Handling Principles for Franchise Owners' Business Behavior Cases" (hereinafter referred to as "Fair Trade Franchise Handling Principles"). It is a continuing relationship in which the franchise store pays a certain price for the use of the franchise store, and assists or guides the operation of the franchise store. However, it does not include the simple purchase of goods or services (hereinafter referred to as goods) at or below the wholesale price for resale or lease.


4type of affiliation

As far as Asia is concerned, franchising can usually be divided into four types: voluntary franchising, franchising, entrusted franchising and cooperative franchising.

(one)Voluntary to join

Voluntary franchising means that individual operators voluntarily join the brand system to open franchise stores, and pay the franchise fee to the headquarters on a regular basis. Franchisees are responsible for their own profits and losses.

In voluntary franchise, franchise stores have equal status with headquarters, have greater management autonomy and profit space, and relatively need to bear most of the preparation and operating costs.

(two)Franchise

Franchising is equivalent to the franchise authorized by the headquarters to operate franchise stores. The stores of franchise stores are still owned by individual operators, but they need to be operated and managed according to the guidance of the headquarters. Therefore, franchise operators need to prepare their own general management and sales expenses such as store, decoration, and employee salaries. , as for the business policy, special equipment, signs and other brand-specific financial tools provided by the headquarters.

Usually franchising operators need to pay a one-time franchise fee to the headquarters to obtain trademark authorization, education and training and other preparations for opening a store in the initial stage.

(three)Entrust to join

Entrusted franchise means that the headquarters entrusts the branches to individual operators. The headquarters will bear most of the preparatory expenses, including store rent, decoration, equipment, trademark rights, business guidance and marketing activities, etc. The franchise store usually only needs to bear the personnel costs and one-time costs. Sexual membership fee. The ownership of the entrusted franchise stores belongs to the headquarters, so the profits of the franchise stores must be turned over first, and then the headquarters will share the profits according to the agreed proportion.

(Four)Cooperation to join

Compared with other types of franchising, cooperative franchising, in turn, is based on franchise stores, and many companies of the same nature organize their own headquarters in order to reduce costs by uniformly purchasing goods, jointly hold advertising and marketing activities, and even recruit more companies to join in.

Because the headquarters is co-founded by the business owners, they generally do not provide business guidance. In addition to being responsible for their own profits and losses, most franchisees only need to pay the headquarters' trademark royalties, or share the operating expenses of the headquarters. There are rare problems of profit distribution, such as Relationships with industry chambers or wholesalers/retailers.

 Voluntary to joinFranchiseEntrust to joinCooperation to join
Storefront and decoration expensesFranchise storeFranchise storeheadquartersFranchise store
Operating Equipment ExpensesFranchise storeheadquartersheadquartersFranchise store
personnel costFranchise storeFranchise storeFranchise storeFranchise store
Headquarters business guidanceHaveHaveHavenone
Marketing activities coordinationFranchise storeheadquartersheadquartersheadquarters
Membership payment methodRegular quotaDisposableDisposableDisposable
The usual profit sharing modelno commissionfixed ratioThe proportion of the commission fluctuates with the turnoverno commission
autonomous spaceBigCh-TWSmallBig
Join at your own costmanyCh-TWfewmany

Attorney's Note:

Many people will translate the English Voluntary Chain (free chain) into voluntary joining, but Voluntary Chain is actually not the same as the voluntary joining mentioned in this article. Voluntary Chain (Freedom Chain) is a common joint purchase and distribution model for small and medium-sized enterprises in Europe and the United States. It refers to the joint purchase of multiple stores in the same industry to jointly purchase goods upstream. Conceptually, it is closer to our so-called cooperative alliance.


What expenses does it cost to join a store?

The following has sorted out the expenses that can be required to join the store, from signing the contract to the operation, so as to facilitate the evaluation of the operators who are willing to join.

  • Franchise fee: paid to the headquarters in exchange for business guidance and brand authorization.
    • Premium
    • store opening reserve
    • Education and training fees
    • ad spend
  • Store rent: Depending on the type of franchise, the headquarters and franchise stores will have different rent allocation methods.
  • Decoration engineering: refers to the infrastructure required for general storefronts, such as water and electricity lines, floors, paints, etc.
  • Equipment and appliances: Refers to the tools for making money with brand characteristics, such as commodity shelves, freezers, counters, signboards, production instruments, etc. of specified specifications.
  • Commodity raw materials, consumables
  • employee salary
  • Hydropower and energy expenditure

What do you need to know before joining a store?

In the "Fair Club Franchise Handling Principles", 7 important conditions are specifically listed, requiring the headquarters to inform interested operators in advance, so that franchise operators can have sufficient information to make correct assessments and judgments when signing contracts.

(one)Headquarters must provide7big key information

The following matters are listed in the "Fair Club Franchise Handling Principles". For the sake of prudence, they are usually included in the terms of the franchise contract.

1. Expenditure items before starting operations

Such as franchise fee, education and training fee, commodity/raw material/consumables fee, equipment fee or rent, decoration project expenditure, etc.

2. Expenses during the joining period

Such as the method of calculation and collection of royalties, as well as business guidance and marketing promotion expenses, commodity/raw material/consumables expenses, etc.

3. Intellectual property authorization conditions

Include the title of the right, scope of use, duration and other restrictions.

4. Management guidance and education and training

Contents and methods of management assistance and training guidance.

5. Business market segmentation

Refers to the business plan or predetermined plan of setting up the same franchise system in the business area where the franchise store is located.

6. Operating conditions and restrictions during the franchise period

For example:

  • The designated purchase channel, brand, specification, minimum purchase quantity, price, etc. of commodities or raw materials.
  • Designated purchase access and specifications for capital equipment.
  • Designated builder and specifications for decoration works.

7. Conditions and handling methods for the modification, termination and cancellation of the franchise contract.

(two)Information provision method

Headquarters can provide the above 7 items of information to franchised stores through paper, email, electronic storage devices, social media or communication software.

It should be noted that if there is a dispute in this part, the burden of proof will fall on the headquarters, and the headquarters needs to prove that it has indeed provided information.


How to write a franchise contract? Notice3big problem

The franchise conditions of each chain system are different, so the content of the franchise contract often must be customized according to the needs of individual cases, and special attention should be paid to the three major issues of price cutting competition, non-compete prohibition, and contract renewal conditions.

(one)How to deal with the competition of price cuts in franchise stores?

Business headquarters often do not want franchisees to compete with each other to undermine market conditions, and often specify clauses such as "the sales price of goods shall not be lower than the recommended selling price of the headquarters" in the franchise contract. Area.

1. Is the suggested selling price in the franchise contract valid?

If there is a suggested selling price in the franchise contract, you should pay attention to whether the nature of the suggested selling price is mandatory.

  • Soft suggested selling price

The soft suggested selling price is really purely a suggestion, only for the reference of the franchise store, and it is in compliance with the law.

  • Hard suggested selling price

If the suggested selling price clause is accompanied by a penalty for breach of contract, which stipulates that if the franchisee fails to abide by it, it will be required to pay compensation or be punished by the headquarters. , and cause the business headquarters to be punished by the Fair Society.

2. Is it legal for franchise stores to cut prices?

Article 20 of the Fair Trade Law stipulates that "an enterprise shall not use low-price inducements or other improper methods to prevent competitors from participating in or engaging in competition". When judging illegal price-cutting competition, factors such as whether the market share of franchise stores is sufficient to affect market competition, the cost of purchasing goods, the length of time for low-price sales, and whether there are any legitimate reasons will be considered. is too short), or jump-off auctions (with justifiable reasons) in which the immediate products are cleared generally do not constitute illegal price-cutting competition.

3. How does the headquarters prevent franchise stores from cutting prices?

If you want to avoid the problem of limiting the resale price, the common practice is to change to the "consignment" model, or the headquarters only provide raw materials, and then the franchise stores make their own finished products.

In the consignment model, the headquarters retains the ownership of the goods, and the franchise stores only sell on behalf of the headquarters, which is not a "resale". However, the consignment model also has shortcomings. Because the sales representative is the headquarters, the responsibility for the relevant product defects or transaction disputes is also borne by the headquarters. In addition, it is not directly recognized by the law that the consignment is stated in the contract. Judgment shall prevail.

In addition to consignment sales, the headquarters can also only supply raw materials, and then the franchise stores can produce finished products according to the process instructed by the headquarters. At this time, the finished product and the raw material are no longer the same product, and naturally there is no problem of resale. However, using this method will easily lead to inconsistent quality of the products produced by each franchise store, which will affect the brand reputation.

(two)Is it possible to agree to a non-compete after the end of the franchise?

In the process of guiding franchise stores, the headquarters will inevitably need to disclose business secrets and knowhow to franchise stores. In order to prevent franchise stores from using these knowledge and technologies to compete with headquarters in the future, many franchise contracts contain special clauses that prohibit non-compete. After the end of the franchise contract, the store owner creates another brand at the original location of the store and continues to operate the business of the same nature.

Regarding the validity of the non-compete clause in the franchise contract, the court has clear review standards. An effective non-compete clause in the franchise contract must meet the following 4 conditions:

  • The headquarters must have business secrets specially protected in accordance with the non-compete.
  • Franchisees need to know the business secrets of the opening due to their positions.
  • The object, period, region, and scope of professional activities that restrict franchisees from continuing to operate similar businesses must not exceed a reasonable range (it is also necessary to consider whether franchisees have difficulties in relocating their businesses).
  • Compensation measures are required to compensate for the damage suffered by the franchisee due to the non-compete.

If the above conditions are not met, the non-compete clause in the franchise contract is likely to become "invalid", and the franchise store may not abide by the terms of this part, which may easily lead to other disputes.

(three)How to evaluate the renewal conditions of the franchise contract?

At present, the law does not mandate that the franchise contract must write the renewal conditions. From the standpoint of the headquarters, it is often hoped to retain the right to agree to whether to renew the contract, so as to screen out the franchise stores whose business conditions do not meet expectations. In just one or two years of joining, the company has paid for itself.

1. Who decides whether to renew the contract?

Renewal is not a unilateral right. Although some franchise contracts are marked as "renewed in advance with the consent of both parties", this is actually not complete, because if the headquarters insists on disagreeing, the franchise store may also resort to legal channels, claiming that the headquarters abuses its rights. In order to reduce disputes, many franchise contracts will be changed to stipulate the "renewal threshold". As long as the business performance of the franchise store reaches the threshold, the franchise owner shall not arbitrarily refuse the renewal request of the franchise store, thereby achieving a two-way guarantee.

2. How to write the franchise renewal clause?

When renewing the contract, it is recommended to discuss matters such as whether the conditions of the previous contract are compared, whether the headquarters has the right to change the reservation conditions, whether the franchise store needs to re-pay the franchise fee, and how long in advance the renewal request needs to be made. .

3. Can the headquarters deliberately not renew the contract?

A few brand headquarters saw the outstanding performance of franchise stores, so they chose not to renew their contracts maliciously, and took back the stores and set up direct-operated branches. This kind of behavior may make the headquarters constitute "abuse of rights" stipulated in Article 148 of the Civil Code. If the brand system has an overwhelming position in the market and reaches the standard of exclusive business, the malicious failure of the headquarters to renew the contract may also constitute the "Fair Trade Law". Article 9 "Abuse of Market Position".

Simple judgment criteria for monopoly business:

  • One business has a market share of 1/2, and the total sales amount in the previous fiscal year has reached the standard announced by the competent authority.
  • The two businesses have a combined market share of 2/3, of which individual businesses have a market share of 1/10, and the total sales amount in the previous fiscal year has reached the standard announced by the competent authority.
  • The three businesses have a combined market share of 3/4, of which individual businesses have a market share of 1/10, and the total sales amount in the previous fiscal year has reached the standard announced by the competent authority.

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