WHAT IS FRANCHISING IN ROMANIA?

In essence, franchising is a system of marketing products or services, whereby the franchisee seeks to exploit the franchisor’s business and the franchisor uses this mechanism to capture the market. The contractual parties are in continuous collaboration and have the common goal of developing, promoting and implementing the business in different territorial areas, although they are legally and financially independent. 

According to Article 1 of Ordinance 52/1997 on the legal regime of franchising, as amended and supplemented by Law No 179/2010: ‘Franchising is a system of commercialization of products and/or services and/or technologies, based on a continuous collaboration between legally and financially independent natural or legal persons, whereby a person, called franchisor, grants to another person, called franchisee, the right and imposes the obligation to operate a business, in accordance with the franchisor’s concept. This right authorizes and obliges the franchisee, in return for a direct or indirect financial contribution, to use the trademarks of products and/or services, other protected intellectual or industrial property rights, know-how, copyrights, and trade marks, with the benefit of a continuous supply of commercial and/or technical assistance from the franchisor, under and during the term of the franchise contract concluded between the parties for this purpose.”

This partnership takes as its starting point the pre-contractual phase during which the franchisor, the holder of a trademark or other intellectual or industrial property right, is obliged to inform the beneficiary of the know-how, also known as savoir faire. Its secrecy will not be fully disclosed, but it will be disclosed sufficiently to make the beneficiary aware of the potential economic advantage it offers. 

Know-how as defined by Regulation (EU) No 330/2012, is “a secret, substantial and identified body of practical, non-patented, unpatented information which results from the experience of the supplier and has been tested by the supplier: in this context secret means that the know-how is not generally known or easily accessible; substantial means that the know-how is significant and useful to the buyer for the use, sale or resale of the contract goods or services; and identified means that the know-how is described in a sufficiently comprehensive manner so as to permit verification of the conditions of secrecy and substantiality.”

The franchisor will make available to the prospective franchisee essential information about the business, such as: the history and experience of the franchisor, details of the identity of the franchisee’s management, the litigation history of the franchisor and its management, the initial amount to be invested by the franchisee, copies of the franchisor’s financial results for the past year, and the ownership information about the pilot unit. Furthermore, information will also be provided on mutual obligations, such as royalties, duration of the contract, contract renewal or termination. 

WHAT IS A FRANCHISOR? 

According to Ordinance 52/1997, the franchisor is the professional who: 

• is the holder of a registered trademark or of an intellectual or industrial property right, rights which must be exercised for a duration at least equal to the duration of the franchise contract; 
• provides the right to exploit or develop a business, product, technology or service;
• provides the franchisee with initial training in the exploitation of that trademark;
• also uses its own financial means for the promotion of its brand or for the development and viability of the product;
• demonstrates the applicability of its know-how in a pilot unit aimed at testing and finalizing the business formula. 

Therefore, the franchisor must own and operate the business prior to the launch of the franchise network, i.e. it must effectively operate the business concept for a period of time prior to the creation of the network. Consequently, the body of knowledge is always dependent on the franchisor’s experience gained over time by testing the franchise system in at least one pilot unit. The pilot unit is “the equivalent of a prototype, intended to provide the easiest way to put the franchisor’s successful network into practice, to test the franchise system and its infrastructure, to serve the design of the franchise program and to develop training manuals and daily operations.” 

TYPES OF FRANCHISING 

Depending on the business carried out by the franchisor, there are several types of franchises:

1. Distribution franchise – this type of franchise involves the transfer of the right and obligation to distribute products created by the franchisor;
2. Service franchising – is the transmission of know-how which enables a particular service to be performed to a high standard of quality in accordance with the specifics of the franchisor’s business; 
3. Production franchising – involves the transmission of technical data in order to produce products;
4. Mixed franchising – combines elements of the three types of franchising mentioned above. 

FRANCHISE COSTS

Prior to the conclusion of the franchise agreement, the franchisor is obliged to provide information about the financial terms of the agreement, such as the amount of the network entry fee also called initial royalty, periodic or advertising royalties. 

Thus, to start with, the need to pay the entry fee should be considered. The amount depends on the case and is set by the franchisor as the economically stronger contractual party. 

In addition, the franchisee will be obliged to pay monthly royalties from the profits obtained, and it is also the franchisee who bears all the costs incurred in setting up the business, so all these costs are brought to the franchisee’s attention before the contract is concluded so that he can calculate the expected result and then proceed to design the business plan.