Well-known international brands like Starbucks, McDonald’s, and KFC, or domestic chains such as Coop Food, GS25, FPT, and Kinh Do, are present in the Vietnamese market thanks to franchising. In the 4.0 technology era, franchising is no longer unfamiliar. The ability to create stronger, faster, and more convenient commercial and financial networks has incentivized many more businesses to capitalize on the stable sources of revenue franchising can provide. It is also considered an extremely effective, safe, and reliable financial resource mobilization channel for franchising businesses. With its inherent advantages for both parties, franchising is being chosen by many established and new businesses to build and implement their investment and business strategies. But is franchising really a safe business trend?

What is Franchising?

From an economic perspective, the essence of franchising is a conditional transaction, in which the franchisor – usually a well-known brand – allows an individual or organization to use its business model, methods, and products in exchange for royalties. In Vietnam, franchising is conducted according to the provisions of Article 284 of the 2005 Commercial Law. 

According to Article 284 of the 2005 Commercial Law, franchising is a commercial activity whereby the franchisor permits and requires the franchisee to conduct the sale of goods and provision of services under the following conditions:

– The sale of goods and provision of services are conducted according to the business organization method prescribed by the franchisor and associated with the franchisor’s trademark, trade name, business secrets, business slogan, business logo, and advertising.

– The franchisor has the right to control and assist the franchisee in managing the business.

According to the provisions of Article 5 of the Commercial Law, amended by Article 8 of Decree 08/2018/ND-CP, the business system intended for franchising must have been in operation for at least one year.

Characteristics of Franchising 

While still a form of business, franchising differs from regular business in the following ways:

– Object of Franchising: The main object of franchising is the right to conduct business activities of providing goods and services according to the franchisor’s method.

– Close Relationship Between Parties: Franchisors and franchisees must often maintain close relations during the contract’s duration. The franchisor is not only required to provide documentation, but also to train the franchisee’s staff. Additionally, franchisors are responsible for keeping franchisees up to date with technical training as their system grows and develops. This close cooperation ensures that their standard of quality is maintained, presenting a unified system. For franchisees, the technical and managerial support from the franchisor reduces the risk of starting a business. Throughout the cooperation, the franchisor has the right to periodically or unexpectedly check the franchisee’s commercial activities. This is a key aspect of franchising, ensuring system consistency and stability in product quality, service, management, and operations across the entire system.

Common Forms of Franchising

Vietnamese law does not explicitly define franchising forms. However, they can be generally classified based on their franchise contract regulations. In practice, this categorization appears as follows:

– Territorial Franchising: This form includes both international and domestic franchising. International brands coming to Vietnam and vice versa, where foreign brand owners invest in Vietnam, or franchising within Vietnam between domestic businesses.

– Distribution Franchising: In this form, the franchisee is allowed to distribute products and services manufactured by the franchisor under a specified scope and duration. This way, the franchisee is allowed to use the franchisor’s symbols, brand names, slogan, and logos during business activities, but isn’t granted the rights to manufacture the goods. This mimics supplier-retailer relationships where the franchisor takes on the roll as the overarching producer. Examples of brands franchised under this form include Coca-Cola and Ford motors.

– Business Format Franchising: This is the most common form of franchising, where the franchisor allows the franchisee to distribute products and use the business formula. Besides transferring brand ownership and business techniques, the franchisor must support the franchisee by providing skilled and experienced managers, effective business management formulas, and training for the franchisee’s staff on essential skills and requirements.

– Development Objective Franchising: This form includes master franchising, affiliate franchising, single-unit franchising, and multi-unit franchising.

• Master Franchising: The franchisee is allowed to sub-franchise within a specific area or territory and commits to developing a certain number of franchised units over time. The exclusive franchisor can sub-franchise to third parties in the form of area development franchising or single-unit franchising.
• Affiliate Franchising: Regional franchisees receive the franchise from the brand owner or exclusive franchisee to resell to individual franchisees, following agreed-upon terms.
• Multi-Unit Franchising: The franchisee is given exclusive rights to open multiple business units in a specific area or territory, but cannot re-franchise.
• Single-Unit Franchising: The franchisee signs a direct contract with the franchisor to open a single business unit according to the franchisor’s system at a specific location. This form is common with brands like KFC, Jollibee, and Lotteria.

Benefits of Franchising

Franchising provides significant benefits for both franchisors and franchisees.

For Franchisees:

– Minimizing Risks When Starting a Business: Starting a business comes with many risks. Franchising helps minimize these actual risks. When engaging in franchising, franchisees receive technical support, experience, training, and guidance on effective business secrets, helping their business quickly stabilize and develop, thus reducing potential risks.

– Applying a Standardized Business Model: The biggest challenge is at the beginning, where even experienced managers might lack the knowledge to establish a new business sector. Besides transferring formulas, products, and services, the franchisor provides management support, including financial procedures, staff management, and processes, helping franchisees overcome their lack of experience. Applying a standardized business model and development plan from the franchisor ensures franchisees develop in the right direction. Many elements of the plan are standard procedures set by the franchisor.The many benefits which a standardized business model may offer, such as technical support, experience, guidance, and business trade secrets can very often streamline the operational process, allowing for a low-risk business that can quickly stabilize and develop.

– Receiving Professional Marketing Support: The franchisor can prepare and fund the development of professional advertising campaigns. National or local marketing benefits all parties. Moreover, the franchisor can advise on developing effective regional marketing programs, helping franchisees share costs from their income.

– Stable and Consistent Product and Material Quality Support: Products and materials are a significant competitive advantage and key to business success. Stable, consistent products and materials, which uphold the franchisor’s brand reputation, are provided to franchisees, ensuring business product quality. This is why customers choose the franchise’s products.

– Financial Support When Necessary: Franchisees may receive financial assistance through the franchisor, which is essential in certain cases. With market knowledge and business experience, the franchisor can arrange for financial institutions like banks to provide loans to franchisees with the franchisor’s support commitments. This provides a significant guarantee for loan approval.

– Established Customer Base: Possibly the most notable advantage of becoming a franchisee. Franchising provides brand recognition, and customer trust in an assured product, leading to a stable, regular customer base.

For the Franchisor

– Expanding Business Scale: Franchising helps the brand be present everywhere. Through franchising, the business scale is expanded, quickly increasing product, goods, and service recognition in the market, something difficult to achieve with other business forms.

– Effective Brand Promotion: Advertising and brand promotion become more effective with more franchise outlets. The presence in multiple locations helps the brand penetrate various markets. As a result, product and service images quickly and easily embed in customers’ minds.

– Increasing Revenue from Other Business Activities: When engaging in franchising, the franchisee pays a fee for the brand, products, materials, and support from the franchisor. The franchisee must also purchase products and materials from the franchisor, further increasing the franchisor’s income, helping expand the business while reducing market entry costs.

Franchising is a safe, low-risk business model that has proven its role in enhancing economic efficiency in Vietnam. Vietnam has made significant strides and is awaiting the right opportunity for a franchising boom. Explore more in the following articles. Don’t forget to follow and update useful information on our website. For detailed guidance, contact us at  info@letranlaw.com.