There is no single definition, but we can highlight the one given by the European Franchise Federation (EFF), which states in the European Code of Ethics for Franchise that “Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, knowhow, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.”
The participants in the franchise business are the franchisor and the franchisee. The franchisee uses the name, know-how, experience, knowledge, and methods developed by the franchisor in its business. Participants in the franchise business conclude a franchise contract (which should not be confused with a franchise clause in insurance) in order to regulate their mutual rights and obligations.
When it comes to franchise contracts, we are talking about autonomous trade contracts created in commercial practice, and since so far only a minority of EU member states have defined and regulated such a contract in their national legislation, then in Croatia we can also talk about an innominate contract which isn’t regulated by any provision. Given that this is an unnamed, i.e., innominate contract, the general provisions of the Civil Obligations Act (NN 35/05, 41/08, 125/11, 78/15, 29/18) apply to the franchise agreements.
The European Union has contributed to the unification of certain segments of the contracts by adopting Regulation No. 330/2010 of the European Commission from April 20th, 2010, on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, particularly the permitted and prohibited provisions of franchise contracts.
In addition to the usual provisions on the conclusion of the contract, duration, termination, etc., the franchise contract usually contains:
- provisions on entering the franchise business of the franchisor (the so-called “System”),
- description of the franchisee’s activities,
- provisions on the trademark and trade secrets protection,
- non-compete clause,
- provisions on entry franchise fees and on any other fees (marketing fee and fee for continuous use of franchise rights, so-called Royalties)
There are many advantages of entering the franchise business and this form of business can be suitable not only for entrepreneurs who aim to expand their existing business, but also for those who want to start a new, own business.
Namely, entering the franchise business, an opportunity opens for the franchisor to grow and expand in the market in which he already operates and where it has developed a profitable business and a recognizable brand, while the franchisee has the opportunity to enter the already well versed field, by working with his own business entity, in his own name and for his account, and in cooperation with a more experienced entrepreneur, from whom he takes the know-how, minimizing the risks of potential failure, using those business models that have proven successful.
By becoming the franchisee, the franchisee continues to operate at its own expense, but under someone else’s, recognizable name, which certainly brings additional responsibilities.