By Adi Ghanma, Senior Associate, Corporate
When did you last have your Starbucks Coffee, was it here in Dubai or back home? During a trip to Jordan this year I enjoyed my daily cup of coffee at the Amman Starbucks close to my parents’ house. Did it taste the same as the Starbucks coffee in Dubai? Honestly, I always ask myself the same question.
How is it possible for multinational companies like Starbucks, with franchises across the globe, to ensure that their customers receive the same quality of service, wherever they are in the world?
The answer is a franchising agreement.
A franchising agreement includes all of the essential legal terms and conditions to govern a franchise. It guarantees that the quality remains unchanged, regardless of the restaurant branch you are eating at, or store where you buy your favorite brand. Ensuring, your Frappuccino will taste the same whether you are having your coffee in Amman, Dubai or anywhere else in the world.
What is franchising?
Franchising is where a business pursues investors to replicate its proven concept and success stories, to the benefit of both parties. The franchiser receives upfront fees from the franchisee for granting business rights and using its logo, which in turn provides automatic benefits from the value of the products, services and brand recognition of the established business. The initial fees also include training and equipment support. As well as the initial fee, the franchise company receives royalty fees from its franchisee(s) as agreed by the parties.
The Difference between an Agency, Distributorship and a Franchise
There is often confusion between a franchise and a distributorship or agency, although the latter are similar to a franchise, there are some slight differences. The relationship between the business and an individual distributor or agent will generally be governed by a master agreement which may impose restrictions on both parties. For instance, the business may agree that it will not sell products in competition with the distributor, or appoint another agent (sole agency) in the same area. The distributor and the franchisee resell or provide services to the public to its own benefit and not as an agent for the business.
Food service operations, hotels, and other businesses associated with catering and tourism continue to be in the vanguard of franchising. However, rapid development is now occurring in service industries generally, including business services and other activities responding to economic, demographic and social changes.
While the largest franchisors continue to dominate the economic scene, smaller franchisors are becoming a common sight, reflecting the capacity of franchising in leveraging the resources of retail operators to augment the contributions by the originators of the concept.
Although franchising remains an attractive option for the small business owner, cross-border franchising has prompted the emergence of considerably larger franchisees, in some cases larger than their franchisors.
International franchising is playing an ever greater role in refining the distribution of goods and services, in that it introduces commercial know-how into emerging markets where those goods or services had not been previously available.
In the past two decades franchising activities took off in countries and regions where it would have been unthinkable years prior, including China, Russia, India, the Middle East and Africa.
Franchise in Practice
In a basic franchising deal, in exchange for a fee the franchisor will license the franchisee to use and benefit from the systems already in place. This not only includes their know-how, but also a package including the intellectual property (IP) rights; the right to use the trademarks, trade names, logo, copyrighted works relating to the manufacturer, sale of goods, or any other services to the customers and the goodwill associated with the business.
Franchise in Dubai
There is no specific piece of legislation specifically related to establishing and operating in a franchise in Dubai. However, the Commercial Law and the franchise agreement signed between the parties shall govern the union between the franchisor and the franchisee.
Dubai, being a pro-business environment, encourage many franchisors to expand their businesses by allowing their brands to enter this ever-evolving market.
Having a franchisee in Dubai is possible in three very simple, but important steps:
- Sign an agreement with a franchisor, after consultation with a lawyer in order to avoid any potential bad terms within the agreement;
- Register the franchise agreement through your lawyer before Dubai Courts. This is mandatory;
- Register your business and obtain the trade license.
Adi is a senior associate in our corporate department. For information on setting up a franchise in the UAE, our team can be contacted on 04 354 4444 or [email protected].