Licensing a ‘concept’. Franchise arrangements are very similar to trademark licences. Franchising concerns the licensing by a franchisor of a ‘concept’ or ‘system’ to one or more franchisees. The concept usually consists of a trade name, trademark, use of an internet domain name, and trade secrets (see section 5.5(d)) in connection with a product and service, accompanied by detailed instructions or a manual regarding the production, marketing, sales and business model of the product and service. Some examples of franchising are hotel chains and fast food restaurants (e.g. Hilton, Meridien, NH Hotels, McDonalds, 7-Eleven, Subway, Burger King, Wendy’s, Kentucky Fried Chicken). Any combination of products or services and set of instructions to ascertain uniformity and recognisability is capable of being franchised.
A franchise often consists of several layers: the main franchisor licences the franchise concept to a limited number of franchisees, with typically one or two franchisees per geographical area. The franchisees, in turn, will have the right to grant sub-licences to sub-franchisees (in parts of the franchise territory). This is a common way to delegate the exploitation of the franchise concept to local entrepreneurs and to limit the management time required to instruct and supervise the sub-franchisees.
Compliance with the concept. More than with trademark licences, a franchise agreement requires strict compliance with the licensed concept and the often-detailed instructions in the operations manual. For example, upon entering such franchise restaurant, the personnel will approach each time exactly the same way, often with exactly the same sentence (“Is there anything else I can do for you?”) or with ‘prohibited’ phrases (such as never say “No problem” after the customer said “Thank you”). Such uniform approach reinforces the consumer’s positive perception and recognition of the trademark.
Developing the concept. A franchised concept usually develops continuously. Compliance with the concept therefore includes a contractual obligation to adopt all the changes in the franchised concept as they are adopted by the franchisor and communicated to the franchisees. Usually only the timing of adopting changes and the contribution by the franchisor in the costs of such changes are (to a limited extent) open to negotiation.
Collaborative element. In order to streamline the feedback of customers and to optimise the franchised concept, many franchise arrangements contain a committee of franchisees (or geographically oriented sub-committees of franchisees). Such committees enable large numbers of franchisees to communicate with the franchisor and to jointly improve the franchised concept.