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Over the years, franchising has emerged as an increasingly popular business model in Singapore.
The franchise business model offers franchisors the opportunity to build their brand and expand their businesses without having to be burdened with additional business loans and capital fundraising typically associated with business expansions. On the other hand, franchisees are able to leverage on the market reputation of existing brands built by franchisors, instead of having to build a new business from scratch.
Fundamentally, franchising involves the buying and selling of the intellectual property of the franchisor, such as the license for the franchisee to sell the products, use the trademarks and adopt the technical and operational knowledge of the franchisor.
Whilst the business case for franchising is clear, the success of franchising arrangements hinge on the existence of robust agreements which protect the interests of both franchisors and franchisees.
This article explores the key clauses which in our view should be stipulated in franchise agreements to ensure fairness and sustainability for all parties involved.
There are no specific franchising laws in Singapore and the general laws of Singapore would apply to such arrangements.
Do note, however, that the Franchising and Licensing Association of Singapore (FLA) published a 6-page Code of Ethics in 2017 which sets out the best practices which franchisors should abide by. The FLA Code of Ethics are only binding on members of the FLA.
In our experience, clients who seek legal guidance after encountering financial losses are often franchisees who signed franchise agreements which do not adhere to the FLA Code of Ethics. The corollary is that if a franchisor has prepared a template franchise agreement which adheres to the FLA Code of Ethics, it would be in a position to provided additional legal comfort to potential franchisees.
Based on the foregoing, it should be apparent that the financial and legal risks and rewards of entering into a franchise arrangement are to be assessed by the parties involved.
This view is likewise expressed in Parliament in 2001 by the then Deputy Prime Minister of Singapore Lee Hsien Loong:
“The public will be reminded time and again that the primary responsibility for making investment decisions lies with themselves and, over time, they will be able to learn to be able to look out for their own interest. […] We cannot go on the basis that the regulator […] will make sure that every investment is safe and sure to make money. If you want to invest, you have to make your own judgement, find out your own information and make your own decisions.”
A typical franchise agreement will include the following salient terms:
(a) Franchise fee and royalties: The initial franchise fee and ongoing royalties, including the manner of calculation, frequency of payment and method of payment, should be provided. Establishing mutually acceptable and clear financial terms set the foundation for a fruitful business relationship.
(b) Identifying territorial rights: The geographical area within which the franchisee has exclusive rights to operate should be clearly defined. The intended effect is to prevent the cannibalisation of sales and protect the revenue and customer base of the franchisee.
(c) Intellectual property rights: The permitted use of trademarks, trade secrets, and proprietary information should be stipulated. This will be useful for maintaining brand consistency while safeguarding intellectual property rights.
(d) Consultancy, training and support: The consultancy, training programme and ongoing support provided by the franchisor should be expressly provided to guide franchisees. Doing so would enhance uniformity in operations and uphold brand standards across all franchise locations.
(e) Systems for monitoring franchisee performance, compliance, and customer satisfaction: This will assist with the identification of issues, so that these are addressed promptly so as to ensure the long-term success of the franchise network.
(f) Supply chain management: The procurement and supply chain procedures should be stipulated. These are quality control measures which would help brands to maintain consistency in product and service offerings.
(g) Term and termination: The terms for the duration, renewal, termination, and assignment of the franchise agreement should be included.
(h) Non-compete and non-disclosure clauses: Clauses which restrict franchisees from engaging in competing businesses during and after the term of the agreement should be included. Doing so would safeguard confidential information post-termination. Do note, however, that such restrictive clauses would only be enforced by the Singapore courts in certain cases. A legal professional would be able to provide closer guidance in this aspect.
As a law firm which specialises in corporate law, our law firm has the capabilities to advise our clients in the following manner:
(a) Recommend viable corporate structures: We advise franchisors on the recommended corporate structure to onboard franchisees within their ecosystem.
(b) Provide guidance with protecting intellectual property: As you will be leveraging on your brand and other intellectual property, these are assets which you should protect.
(c) Conduct legal due diligence: We assist with the conduct of due diligence on both franchisors and franchisees so that our clients are able to assess the business viability of entering into such franchise arrangements.
(d) Advise on specific regulations concerning certain industries: We conduct research and advise on Singapore law which may be relevant to particular industries, including the food and beverages (F&B) industry.
(e) Draft and negotiate the franchise agreement: We are well-versed with the business of franchising and are able to draft contractual terms which cohere with market practice and in compliance with Singapore law. A well-drafted and negotiated franchise agreement will minimise legal disputes and incentivise cooperation, thereby setting franchisors and franchisees up for business success.
(f) Draft the franchise operations manual (FOM): This document supplements the franchise agreement. Certain aspects of the business, such as operational procedures, logistical guidelines, and administrative protocols, may not warrant inclusion within the franchise agreement. A well-drafted FOM would empower franchisors to uphold and regulate the quality, branding, and overall image of the brand. This is especially important for brands with multiple franchisees or an international presence where brand consistency is paramount.
The drafting of comprehensive franchise agreements requires a balance between protecting the interests of both franchisors and franchisees whilst promoting a collaborative and sustainable business relationship.
The value-add which our legal team can provide will enhance the ability of franchisors and franchisees to succeed in their franchise arrangements and also avoid financial losses.
*****
Our firm assist both franchisors and franchisees with the preparation and negotiation of franchise agreements.
The author, Waltson Tan, is a corporate lawyer trained in London and Singapore. He is qualified as an advocate and solicitor in Singapore, and has more than seven years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Waltson also advises clients on a monthly and yearly retainer basis, where he provides dedicated services to each client in relation to the issues which clients face, including general corporate and employment related matters.
If you require further information and/or expert guidance on the above or any other area of law, you may wish to contact the author of the article, whose details are as follows:
Waltson Tan Director +65 8079 0028 waltson@tjylaw.com.sg |
Office address: 101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358 |
6 February 2024
Over the years, franchising has emerged as an increasingly popular business model in Singapore.
The franchise business model offers franchisors the opportunity to build their brand and expand their businesses without having to be burdened with additional business loans and capital fundraising typically associated with business expansions. On the other hand, franchisees are able to leverage on the market reputation of existing brands built by franchisors, instead of having to build a new business from scratch.
Fundamentally, franchising involves the buying and selling of the intellectual property of the franchisor, such as the license for the franchisee to sell the products, use the trademarks and adopt the technical and operational knowledge of the franchisor.
Whilst the business case for franchising is clear, the success of franchising arrangements hinge on the existence of robust agreements which protect the interests of both franchisors and franchisees.
This article explores the key clauses which in our view should be stipulated in franchise agreements to ensure fairness and sustainability for all parties involved.
There are no specific franchising laws in Singapore and the general laws of Singapore would apply to such arrangements.
Do note, however, that the Franchising and Licensing Association of Singapore (FLA) published a 6-page Code of Ethics in 2017 which sets out the best practices which franchisors should abide by. The FLA Code of Ethics are only binding on members of the FLA.
In our experience, clients who seek legal guidance after encountering financial losses are often franchisees who signed franchise agreements which do not adhere to the FLA Code of Ethics. The corollary is that if a franchisor has prepared a template franchise agreement which adheres to the FLA Code of Ethics, it would be in a position to provided additional legal comfort to potential franchisees.
Based on the foregoing, it should be apparent that the financial and legal risks and rewards of entering into a franchise arrangement are to be assessed by the parties involved.
This view is likewise expressed in Parliament in 2001 by the then Deputy Prime Minister of Singapore Lee Hsien Loong:
“The public will be reminded time and again that the primary responsibility for making investment decisions lies with themselves and, over time, they will be able to learn to be able to look out for their own interest. […] We cannot go on the basis that the regulator […] will make sure that every investment is safe and sure to make money. If you want to invest, you have to make your own judgement, find out your own information and make your own decisions.”
A typical franchise agreement will include the following salient terms:
(a) Franchise fee and royalties: The initial franchise fee and ongoing royalties, including the manner of calculation, frequency of payment and method of payment, should be provided. Establishing mutually acceptable and clear financial terms set the foundation for a fruitful business relationship.
(b) Identifying territorial rights: The geographical area within which the franchisee has exclusive rights to operate should be clearly defined. The intended effect is to prevent the cannibalisation of sales and protect the revenue and customer base of the franchisee.
(c) Intellectual property rights: The permitted use of trademarks, trade secrets, and proprietary information should be stipulated. This will be useful for maintaining brand consistency while safeguarding intellectual property rights.
(d) Consultancy, training and support: The consultancy, training programme and ongoing support provided by the franchisor should be expressly provided to guide franchisees. Doing so would enhance uniformity in operations and uphold brand standards across all franchise locations.
(e) Systems for monitoring franchisee performance, compliance, and customer satisfaction: This will assist with the identification of issues, so that these are addressed promptly so as to ensure the long-term success of the franchise network.
(f) Supply chain management: The procurement and supply chain procedures should be stipulated. These are quality control measures which would help brands to maintain consistency in product and service offerings.
(g) Term and termination: The terms for the duration, renewal, termination, and assignment of the franchise agreement should be included.
(h) Non-compete and non-disclosure clauses: Clauses which restrict franchisees from engaging in competing businesses during and after the term of the agreement should be included. Doing so would safeguard confidential information post-termination. Do note, however, that such restrictive clauses would only be enforced by the Singapore courts in certain cases. A legal professional would be able to provide closer guidance in this aspect.
As a law firm which specialises in corporate law, our law firm has the capabilities to advise our clients in the following manner:
(a) Recommend viable corporate structures: We advise franchisors on the recommended corporate structure to onboard franchisees within their ecosystem.
(b) Provide guidance with protecting intellectual property: As you will be leveraging on your brand and other intellectual property, these are assets which you should protect.
(c) Conduct legal due diligence: We assist with the conduct of due diligence on both franchisors and franchisees so that our clients are able to assess the business viability of entering into such franchise arrangements.
(d) Advise on specific regulations concerning certain industries: We conduct research and advise on Singapore law which may be relevant to particular industries, including the food and beverages (F&B) industry.
(e) Draft and negotiate the franchise agreement: We are well-versed with the business of franchising and are able to draft contractual terms which cohere with market practice and in compliance with Singapore law. A well-drafted and negotiated franchise agreement will minimise legal disputes and incentivise cooperation, thereby setting franchisors and franchisees up for business success.
(f) Draft the franchise operations manual (FOM): This document supplements the franchise agreement. Certain aspects of the business, such as operational procedures, logistical guidelines, and administrative protocols, may not warrant inclusion within the franchise agreement. A well-drafted FOM would empower franchisors to uphold and regulate the quality, branding, and overall image of the brand. This is especially important for brands with multiple franchisees or an international presence where brand consistency is paramount.
The drafting of comprehensive franchise agreements requires a balance between protecting the interests of both franchisors and franchisees whilst promoting a collaborative and sustainable business relationship.
The value-add which our legal team can provide will enhance the ability of franchisors and franchisees to succeed in their franchise arrangements and also avoid financial losses.
*****
Our firm assist both franchisors and franchisees with the preparation and negotiation of franchise agreements.
The author, Waltson Tan, is a corporate lawyer trained in London and Singapore. He is qualified as an advocate and solicitor in Singapore, and has more than seven years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Waltson also advises clients on a monthly and yearly retainer basis, where he provides dedicated services to each client in relation to the issues which clients face, including general corporate and employment related matters.
If you require further information and/or expert guidance on the above or any other area of law, you may wish to contact the author of the article, whose details are as follows:
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