The Nigerian International Franchise Association defines a franchise as “a business arrangement” where “the franchisor grants the franchise operator (the franchisee) the right to distribute certain products or services in a particular way, at a particular location, and for specified periods of time. In return, the franchisee pays the franchisor fees and royalties.”
The association states that there are two types of franchise arrangements: business and product franchises. Where the former, and most widely known, has a business as its main object, the latter is centred on the product, where the “franchisor manufactures and distributes a physical product offered to consumers through retail dealerships”.
A franchising contract can be very advantageous for the franchisor and the franchisee. When beginning a business there are many factors to be considered: potential success and growth margin, and possibility for creating a profit as well as money invested, location, brand strength and risk assessment.
Starting a business can be dauting for many reasons—the risk of failure being the ultimate. In this sense, a franchise can be a very attractive option. If a company decides to take the franchising route for its business, it is because the same is successful and well established.
It is often easier to obtain finance aid given that investors can trust in a business model that has been tested and proven successful, with a network and support structure to help it thrive.
The support system is one of the many advantages in choosing a franchise when compared to creating a business from scratch. Franchisees will benefit from the know-how, guidance, and experience of the franchisor, following guidelines and taking advantage of the marketing, accounts and strategy already put in place by the franchisor.
Like everything else, this contract model also has disadvantages, of course, such as lack of control, being tied up to a supplier network that might not be the most beneficial in terms of cost/quality and necessary cuts in profit, to name a few.
There is also one clear factor that is beneficial for the franchisee at the start point but might pose a liability for the franchisor: the brand’s reputation.
A strong brand is essential for a successful franchise business. If the franchise contract was a house, the brand would be the façade. It is what people recognise to be of value and what will turn strangers familiar with the brand into costumers: people tend to trust a brand that they know sooner than a brand they are not familiar with.
For example, when in a foreign country we can always count on the fact that a hamburger sold at McDonald’s will taste the same as it does in our hometown. This type of consistency of the brand makes people eat at a McDonald’s anywhere in the world. Of course, the ability of a franchise to maintain customers will depend on how the franchisee operates.
"In franchising, and especially if there is the transfer of IP rights in a business, it is important that the necessary steps and measures are taken to protect IP rights from unauthorised usage and exploitation by potential franchisees."
Will selling franchises leave your brand in jeopardy?
A franchisor must measure the pros and cons of allowing a franchisee to take on a parcel of the market by sharing the business model it has so carefully curated. One of the biggest risks is damage to the brand’s reputation.
For a franchising deal to work it is essential that the franchisor knows how to protect the brand. Strong brands are built on consistency, reliability, and a solid ability to stay true to the original concept.
Franchisees that take on the challenge of buying into a franchise must mirror the efforts of the counterpart to maintain a strong brand and good reputation, otherwise, they might do more harm than good.
Focusing on Nigeria, it is important to state that there is no specific law that regulates the offer and sale of franchises, which makes the franchise contract of utmost importance for the protection of both parties.
There is no specific regulatory agency or legislation regulating franchise arrangements in Nigeria. To ensure the adequate protection of the IP rights covered in a franchise arrangement, recourse is made to other existing laws and regulatory agencies. For example, the National Office for Technology Acquisition and Promotion (NOTAP) Act requires that all agreements for the transfer of foreign technology to Nigerian parties should be registered with NOTAP not later than 60 days from the execution of the agreement.
Section 4 of the NOTAP states that such agreements are registrable if their purpose or intent is, in whole or partially, for or in connection with the use of trademarks and/or patents, supply of technical expertise in the form of technical assistance of any description, supply of detailed engineering drawings, supply of machinery and plant and provision of operating staff, managerial assistance, and the training of personnel.
In franchising, and especially if there is the transfer of IP rights in a business, it is important that the necessary steps and measures are taken to protect IP rights from unauthorised usage and exploitation by potential franchisees.
The franchisors have a general duty of brand reputation management of their franchise especially as it relates to the way the franchise business is run, using the trademark, inventions and confidential information, and promotional materials. There should be written clauses between parties to regulate the IP use within the franchise agreement.
It is important to note that, as opposed to some jurisdictions, there is no statutory requirement, aside from those that may be implied from persuasive foreign case laws, for a trademark licensor/franchisor to ensure that specific standards are met by the licensee/franchisee in Nigeria. Likewise, there is no requirement that a trademark must be transferred along with the goodwill in the business.
It is also important that the franchisor obtains legal protection for the trademark of its franchise in the franchisee jurisdiction since trademark registrations are territorial in nature.
Trademarks in Nigeria are filed at the Nigerian Trademark Registry. The time frame of a trademark registration until completion may take 12 to 18 months and trademarks are valid for seven years counting from the filing date and may be consecutively renewed for periods of 14 years.
Applications must be filed by registered trademark agents and the required documents include a signed power of attorney, full name and address of the applicant, complete list of goods and services and a sample of the mark (for word and device and device trademarks).
Trademark registration will give the franchisor exclusive rights and protection of its trademark in the jurisdiction of the franchisee.
Trademark registration is very important in a franchise agreement as it prevents the unauthorised usage of the trademark, which then ensures the franchisor takes control over the brand by protecting it and ensuring its consistency, and in doing so maintains the high value of the original trademark.
Furthermore, apart from the registration of the franchisor's trademark in Nigeria, there is a need for the franchisor to grant a right of use (ie, a licence) to the franchisee to use its brand name in Nigeria. Such a licence must be recorded at the Nigerian Trademark Registry to avoid objections by interested parties seeking a declaration of abandonment of trademark for non-use.
The required documents to file a trademark licence in Nigeria include a power of attorney from the proprietor and the licensee, a declaration and statement of case, and a licence agreement, both with verified English translation.
"Brand reputation is the public’s perception of a company, and it will be affected based on their personal experience with the brand. When you franchise your business, you are allowing branches to grow from the tree trunk that is the original outlet."
There are essentially two main risks when it comes to brands in franchising agreements: (i) getting a bad brand reputation; and (ii) violation of trademark rights.
The franchisor, especially in jurisdictions such as Nigeria where the law is absent, must ensure that the intellectual property assets of the brand are protected before allowing a third party to operate their business in a new market or in a different market share.
Brand reputation is the public’s perception of a company, and it will be affected based on their personal experience with the brand. When you franchise your business, you are allowing branches to grow from the tree trunk that is the original outlet.
If one of those branches begins to rot it might be difficult to protect the whole tree from contamination. It is essential to ensure that guidelines and regulations imposed by the franchisor to protect the brand’s reputation are not only written down but fulfilled in a manner where non-compliance should lead to the franchise licence being withdrawn.
The violation of trademarks is an imminent risk in franchising deals and the franchisor must ensure the complete control and protection of the trademark before selling franchises in a jurisdiction. The trademark should be owned by the franchisor and licensed to the franchisee—this will ensure control of the IP assets and avoid registrations in bad faith and trademark violations. We also advise incorporating strong IP clauses in the franchising agreement.
This is a co-published article, which was originally published in the World Intelectual Property Review (WIPR)