Franchising is a very popular chain business activity in the food, beverage, and retail industries. Procedures for operating a franchise business are not too complicated.

This article was consulted by Lawyer Nguyen Quang Trung

Legal grounds:

• Commercial Law 2005;
• Decree No. 35/2006/ND-CP;
• Decree No. 120/2011/ND-CP;
• Circular No. 09/2006/TT-BTM.

Franchising is a very popular business activity, often chosen by many foreign investors to develop business in Vietnam in the food and beverage and retail industries. For example:  KFC, Mcdonald’s, Pizza Hut, Lotteria, Family Mart, 7-Eleven, G25, Circle K, Shop&go, Miniso.

This article will provide detailed instructions on franchise procedures as follows:

1. What is a franchise?

Franchising is a form of business following a chain model, in which:

• The franchisor (an individual or organization) allows the franchisee (another individual or organization) to do business using the franchisor’s tradename, trademark, formula, and business process.
• The franchisee must pay the fee and accept the conditions set forth by the franchisor. The franchisee must also ensure product and service quality standards and be subject to the franchisor’s control.

2. Forms of franchising

In the franchising business, the franchisor can give the franchisee the right to use many of the franchisor’s intangible assets such as:

• Tradename;
• Trademark;
• Business icons;
• Business secrets;
• Production and business processes;
• Product processing formula;
• …

Therefore, there will be many types of franchise cooperation. In general, there will be 2 forms of franchising as follows:

• Franchising of trademark: the franchisee is allowed to use the franchisor’s tradename, product and service brands for business. This form is widely used in the retail goods industry.
• Franchising of operating processes/formulas/secrets for producing products and services: the franchisee is allowed to apply production and business processes and use formulas/secrets for producing products and services of franchisor. For example, producing confectionery, drinks (coffee, milk tea, etc.) according to the franchisor’s formula.

3. Conditions for franchising

For a successful and legally secure franchise business, the parties in the franchise transaction need to ensure the following minimum elements:

• The proposed franchised business system must have been in operation for at least 1 year;
• Enterprise parties must be legally established and have fully registered business lines corresponding to the franchise business system;
• Trademarks, tradenames, and business secrets need to be registered as intellectual property rights and used legally;
• Ensuring business conditions for franchise business such as: food safety and hygiene, fire prevention, alcoholic beverage retail,…

The above requirements help ensure that franchise business activities meet the conditions prescribed by law, as well as limit disputes over intellectual property use rights.

4. Procedures for registering a franchise

After the parties have agreed on the franchise agreement, the franchisor needs to carry out franchise registration procedures with the Ministry of Industry and Trade. Except for the following two cases, which are exempt from registration procedures but still have to make periodic reports to the Department of Industry and Trade:

• Domestic franchising;
• Franchising from Vietnam to foreign countries.

Procedures for registering a commercial franchise at the Ministry of Industry and Trade are as follows:

Documents of the franchise registration:

Pursuant to Article 19 of Decree No. 35/2006/ND-CP, amended by Decree No. 120/2011/ND-CP, documents include:

• Application for commercial franchise registration according to form MD-1 in Appendix II issued with Circular No. 09/2006/TT-BTM;
• Documents of franchise introduction as prescribed in Appendix III issued with Circular No. 09/2006/TT-BTM;
• Business registration certificate or other legal establishment documents (notarized copy);
• Certificate of protection of industrial property rights in Vietnam or abroad in case of transfer of rights to use industrial property objects that have been granted protection certificates (Notarized copy);
• Documents proving the original franchisor’s approval to sub-franchise (In case the trader registers franchising activities as a secondary franchisor).

Note: If the above documents are issued by a foreign agency, they must be consular legalized.

Procedure for registering a franchise:

Pursuant to Article 20 of Decree No. 35/2006/ND-CP, the specific registration order is as follows:

• The franchisor submits a commercial franchise registration application to the Ministry of Industry and Trade (only in cases where registration is required);
• If the application is valid, the Ministry of Industry and Trade registers in the Franchise Activity Register and notifies the registrant within 5 working days,
• If the dossier is incomplete, the Ministry of Industry and Trade notifies the additional franchisor within 2 working days.

5. Franchise contract

To conduct business under the franchise model, the franchisor and franchisee must enter into a franchise contract. The main contents of the contract include:

1. Content of commercial rights.
2. Rights and obligations of the franchisor.
3. Rights and obligations of the franchisee.
4. Prices, recurring franchise fees and payment methods.
5. Validity period of the contract.
6. Renewing, terminating contracts and resolving disputes.

In addition, the parties should have additional important provisions including:

• Specific content about franchising: number of franchised stores, franchise scope, franchise costs, franchise period, payment, control rights and support of the franchisor, prohibitions, responsibilities liability for breach of contract;
• Commitments of each party;
• Terms of contract extension;
• Dispute resolution clause.

6. General rights and obligations of the parties in a commercial franchise

The parties in a franchise transaction have the right to freely agree on the rights and obligations of each party. If the parties do not have a specific agreement, the rights and obligations of each party will be as follows:

For franchisors:

The rights of the franchisor are stipulated in Article 286 of the 2005 Commercial Law as follows:

1. Receive franchise money;
2. Organize advertising for the franchise system and franchise network;
3. Regularly or irregularly inspect the operations of the franchisee to ensure the consistency of the franchise system and the stability of the quality of goods and services.

The franchisor’s obligations are stipulated in Article 287 of the 2005 Commercial Law as follows:

1. Provide instructional documents on the franchise system to franchisees;
2. Initial training and provision of ongoing technical assistance to franchisees to operate operations in accordance with the franchise system;
3. Design and arrange sales and service locations at the franchisee’s expense;
4. Ensuring intellectual property rights for objects stated in the franchise contract;
5. Equal treatment of franchisees in the franchise system.

For franchisees:

The rights of the franchisee are stipulated in Article 288 of the 2005 Commercial Law as follows:

1. Require the franchisor to provide adequate technical assistance related to the franchise system;
2. Require the franchisor to treat other franchisees equally in the franchise system.

The franchisee’s obligations are stipulated in Article 289 of the 2005 Commercial Law as follows:

1. Pay franchise fees and other payments under the franchise contract;
2. Invest in sufficient facilities, financial resources and human resources to receive the rights and business know-how transferred by the franchisor;
3. Accept the control, supervision and guidance of the franchisor; comply with the franchisor’s requirements on design, sales location arrangement, and service provision;
4. Keep the franchised business secrets secret, even after the franchise contract ends or is terminated;
5. Stop using trademarks, tradenames, business slogans, business symbols and other intellectual property rights (if any) or the franchisor’s system upon the end or termination of the franchise contract;
6. Operate in accordance with the franchise system;
7. Sub-franchise is not allowed without the consent of the franchisor.