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What is Business Format Franchising?

 

Definitions of a business format franchise can be found in the literature published by the International Franchise Association and the European Franchise Federation. This defines a franchise as: A package of industrial property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of the provision of services to end users. 

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The term "know-how" referred to in the definition is defined as a package of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identified. What do "Secret, Substantial and Identified mean?

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Secret means that the know-how as a body or in the precise configuration and assembly of its compontents is not generally known or easily accessible. It is not limited in the narrow sense that each individual component of the know-how should be totally unknown or unobtainable outside the franchisor´s business. 

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Substantial means that the know-how includes information, which is of importance for the sale of goods or the provision of services to end-users. And in particular for the presentation of goods for sale, the processing of goods in connection with the provision of services, methods of dealing with customers, and administrations and financial management. The know-how must be useful for the franchisee by being capable, at the date of conclusion of the agreement, of improving the competitive position of the franchisee, in particular by improving the franchisee´s performance of helping it to enter into a new market. 

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Identified means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that is fulfils the criteria of secrecy and substantiality. The description of the know-how can be either set out in the franchise agreement, or in a seperate document like the manual. 

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In summary what is clear from various definitions is that the following four key factors need to be present in a Business Format Franchise

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There has to exist intellectual property in the form of a trade mark, trade name and know-how, which is owned by someone and which is secret in the way in which has just been described. 

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The right to exploit this intellectual property has to be given by the owner to another person thereby enabling that person to use it subject to regulation and control by the owner. 

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There has to be an element of "know-how"/show-how" whereby knowledge possessed by the owner, franchisor, is transferred to the franchisee, thereby enabling him or her to properly exercise the rights granted by the franchisor. 

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There has to be payment by the franchisee to the franchisor, usually on an on-going basis and an initial franchise fee, for the continuing exercise of those rights. 

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