What is a Franchise and Why is it Important?
A franchise is a business arrangement or license that grants a franchisee the right to use the franchisor’s brand name, business model, and intellectual property to operate a business. The franchisee typically pays fees or royalties to the franchisor and must adhere to specific standards and rules.
Franchising offers several advantages for franchisors over opening company-owned branches. It allows businesses to expand with less capital investment and lower risk, as franchisees bear the costs of setting up and operating the business. This model enables rapid business growth, provides access to new markets, and generates additional revenue through fees and royalties.
Types of Franchises
● Product Distribution Franchise: Franchisees sell the franchisor’s products using the franchisor’s brand. e.gCar dealerships.
● Business Format FranchiseFranchisees operate a complete business system provided by the franchisor, which includes branding, operational support, and marketing.
e.g Fast-food restaurants like McDonald’s.
● Manufacturing Franchise:Franchisees manufacture and sell products under the franchisor’s brand using proprietary methods or formulas. e.g Soda bottling companies.
● Business Opportunity Franchise:Franchisees sell specific products or serviceswith minimal support from the franchisor.e.g Vending machine businesses.
● Conversion FranchiseExisting independent businesses are converted into franchises, adopting the franchisor’s brand and systems.e.g Local real estate agencies adopting a national franchise brand.
● Co-Branding Franchise:Two or more franchises share the same location, offering complementary products or services.e.g, Coldstone creamery and domino’s pizza
operating in the same space.
● Area Development FranchiseFranchisees receive the right to open multiple locations within a defined area or region.e.g A retail chain expanding through multiple
stores in a specific city.
● Master Franchise:A master franchisee has the right to operate and sell franchises in a defined region or territory, acting almost like a franchisor within that area.e.g: A gym chain expanding into new countries.
Key Legal Components of a Franchise Agreement
What is a Franchise Agreement?
A franchise agreement is a legally binding contract between a franchisor and a franchisee. It defines the terms under which the franchisee may use the franchisor’s brand, systems, and intellectual property to operate the business.
Key Components of a Franchise Agreement
● Grant of Rights:The franchise agreement clearly outlines the rights granted to the franchisee, such as the right to use the franchisor’s intellectual property, specific
products, and operating procedures.
● Franchise Fee:The agreement specifies the financial obligations of the franchisee, including initial fees, ongoing royalties, and other payments.
● Territorial Rights:This section defines the geographical territory in which the franchisee is allowed to operate and whether the franchisee has exclusive rights to that
territory.
● Obligations of the Parties:The agreement lists the responsibilities of both the franchisor and the franchisee. This can include providing support, maintaining brand standards, and operating the business according to the franchisor’s guidelines.
● Term and Renewal:The duration of the franchise agreement is clearly stated, along with the procedures for renewing or terminating the contract.
● Dispute Resolution:This section outlines how disputes between the franchisor and franchisee will be resolved, whether through arbitration, mediation, or litigation.
● Confidentiality and Non-Compete Clauses:The agreement may include provisions that prevent the franchisee from sharing proprietary information and from
operating a competing business during and after the term of the franchise.
● Indemnification and Liability:This component defines which party is responsible for legal claims, damages, or losses that may arise during the operation of the franchise.
● Use of Trademarks and Intellectual Property :The franchisee’s rights to usethe franchisor’s trademarks, logos, and proprietary business methods are specified in
this section.
LEGAL FRAMEWORK OF FRANCHISING IN NIGERIA
As of now, Nigeria has no specific law on franchise, however, there are multiple other general laws that can be applied to franchising in Nigeria. They include:
● Contract Law: Contract law governs the terms of franchise agreements. The parties toa franchise agreement are bound by contract and common law principles. Franchise agreements must meet basic contract requirements such as offer, acceptance, consideration, and intention to create legal relations. Terms of the franchise agreement, including rights, obligations, fees, and dispute resolution, must be clearly outlined and agreed upon by both parties.
● Intellectual Property Law
Franchising relies heavily on the use of intellectual property, such as trademarks, logos, and business systems. The franchisor’s brand is a valuable asset, and its protection is very important . Intellectual property law in Nigeria is governed by various statutes, such as:
● Trademarks Act: This law governs the registration and protection of trademarks in Nigeria. Franchisees are granted rights to use the franchisor’s registered trademarks, and it is important for franchisors to ensure their trademarks are protected in Nigeria.
● Patents and Designs Act: If the franchisor uses patented products or designs, these need to be protected under the Patents and Designs Act.
● Copyright Act: This act protects the franchisor’s creative works, including business manuals, training materials, and marketing content.
● Competition Law: The Federal Competition and Consumer Protection Commission (FCCPC) oversees anti-competitive practices in Nigeria, and regulates fair competition and consumer protection. It ensures that franchisees, as well as franchisors, engage in fair trade practices and avoid anti-competitive behaviors.
● Taxation Law
Franchisees and franchisors in Nigeria are liable to Taxes,such as;:
● Company Income Tax (CIT): Franchised businesses must pay taxes on profits generated in Nigeria under the Companies Income Tax Act (CITA).
● Value Added Tax (VAT): VAT is levied on the supply of goods and services in Nigeria, and franchisees must comply with VAT requirements on the sale of goods and services.
● Withholding Tax: Franchisees may be required to withhold a portion of payments (e.g.,royalties) to the franchisor as tax and remit it to the Nigerian tax authorities.
Other laws include;
● Labour and Employment laws, which franchisees in Nigeria must comply with, which includes the Labour Act and regulations on wages, working conditions,
and employee rights.
● Dispute resolution laws, such as the Arbitration and Mediation act 2023, which governs the way in which conflicts would be resolved between both parties.
● Foreign Investment Regulations, which applywhere the franchisee is an alien, laws like;
Nigerian Investment Promotion Commission (NIPC) Act: This act governsforeign investments in Nigeria. Foreign franchisors may need approval from the
NIPC to operate in Nigeria.
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act: This act governs the repatriation of profits, such as franchise fees and royalties, from
Nigeria to a foreign franchisor.
CONCLUSION
Franchising in Nigeria operates under a broad legal framework covering contract law, intellectual property, taxation, and employment laws. While there is no
specific franchise legislation, ensuring compliance with these general laws is essential for a successful franchise relationship in Nigeria.