Commercial franchise (Franchise) is increasingly popular in Vietnam. Some typical franchise models of Vietnamese businesses include Trung Nguyen, Pho 24, Kinh Do Bakery, Ninomaxx fashion, Bobby Brewers coffee business… Business development by franchising method brings many benefits to the franchisor as well as the franchisee. So, what is a franchise? What are the conditions for franchising in Vietnam?
1. What is a Commercial franchise?
Commercial franchise means a commercial activity whereby franchisors permit and require franchisees to undertake by themselves to purchase or sell goods or provide services on the following conditions:
(i) The purchase or sale of goods or provision of services shall be conducted in accordance with methods of business organization prescribed by franchisor and associated with the franchisor’s trademarks, trade names, business knows-how, business slogan, business logos and advertisements.
(ii) Franchisors shall be entitled to supervise and assist franchisees in conducting their business activities.
(Article 284 Commercial Law 2005)
2. Conditions for Commercial franchise
Decree No.35/2006/ND-CP amended and supplemented by Decree No.08/2018/NĐ-CP (Decree 35) stipulates the conditions for Commercial franchise that must be met by both the franchisor and the franchisee, specifically:
– For the franchisor
According to Decree 35, one of the conditions for commercial franchise is that the system intended for franchising must have been operating for at least one year. (Article 8, Decree 35).
Thus, the franchisor must note that this condition applies to the business system, not to the trader. The one-year period is counted from the date of issuance of the Certificate of Business Location for the first store in the business system. The store and the business system must have been actually operating in practice at the same time.
– For the franchisee:
According to Article 6 Decree 35, traders are allowed to receive commercial rights when they have registered a business line appropriate to the subject of commercial rights. However, Decree No.08/2018 has removed this condition, which means this entity can freely participate in franchise relationships without being bound by any specific requirements.
Although current legal provisions do not impose requirements on the franchisee, the franchisor can include strict conditions for the franchisee through agreements to protect their rights and interests.
3. Form and content of a franchising contract
3.1. Form of a franchising contract
Article 285 of the Commercial Law 2005 stipulates that Commercial franchise contracts must be made in writing or in other forms of equivalent legal validity.
In franchising, the franchisor may have to share critical information such as business know-how, trade secrets,… with the franchisee. This can raise concerns about information leakage.
However, this is one of terms of franchise contract, this information must be presented in written form or other forms of equivalent legal validity. To address this issue, the franchisor can include non-disclosure terms and provisions for compensation in the event that the franchisee discloses trade secrets to third parties.
3.2. Contents of the franchising contract
According to Article 11 Decree 35, a franchising contract may have the following principal contents:
(i) Content of franchised commercial right.
(ii) Rights and obligations of the franchisor;
(iii) Rights and obligations of the franchisee;
(iv) Price, periodical franchise fee and method of payment;
(v) Valid term of the contract;
(vi) Renewal and termination of the contract, and settlement of disputes.