Forms of franchising: An analytical guide by Tran & Co. Attorneys

Vietnam’s retail and F&B boom have given rise to diverse forms of franchising, yet choosing the wrong model can lead to serious legal and financial repercussions. At Tran & Co. Attorneys, we serve as strategic architects rather than mere legal advisors. This article breaks down the pros and cons of each form to help you make a prudent and well-informed investment decision.

1. Defining commercial franchising

Franchising is a business methodology wherein the franchisor grants the franchisee the entitlement to exploit a standardised business format, encompassing the brand, operational know-how, management systems, and proprietary products or services, in exchange for a franchise fee and an undertaking to adhere to the system’s operational standards.

1.1 Core concept

Franchising is an established business methodology wherein the franchisor grants the franchisee the entitlement to exploit a standardised business format, encompassing the brand, operational know-how, management systems, and proprietary products or services, in exchange for a franchise fee and an undertaking to adhere to the system’s operational standards. Pursuant to the Vietnamese commercial law, franchising is delineated as a commercial activity where the franchisor permits and requires the Franchisee to independently conduct the sale of goods or provision of services under stipulated conditions.

1.2 The imperative of model pre-selection

Each franchising model conveys a distinct level of control, capital commitment, and inherent risk exposure. A sole individual investor possesses requirements fundamentally different from those of a conglomerate seeking to introduce a master franchise brand from jurisdictions like Korea or Japan into Vietnam. Misunderstanding the appropriate structure inevitably leads to the negotiation of lax contracts, deficient in protective clauses vital for safeguarding core interests.

2. The most prevalent forms of franchising

To facilitate the reader’s systematic comprehension, and based on our extensive consulting experience, Tran & Co. Attorneys delineates the salient forms of franchising grounded in the scope of authority and operational structure.

2.1 Product distribution franchise

This represents the most fundamental structure. The franchisee is licensed to sell the franchisor’s products and utilise the associated logo and trademarks, yet retains a high degree of autonomy in the day-to-day conduct of the business.

• Application: Predominant in the automotive sector (dealerships), petroleum distribution, machinery equipment, and non-alcoholic beverages (bottling operations).
• Advantage: Characterised by flexibility and minimal adherence to stringent, detailed operational protocols.
• Disadvantage: A paucity of integrated support regarding system-wide marketing and administrative management from the parent entity.

2.2 Business format franchise (Comprehensive model)

This is widely regarded as the most prevalent and rigorously structured format currently in practice. The franchisee not only sells the product but also acquires the rights to the entire business methodology (Know-how), corporate identity system, training processes, and marketing framework.

• Characteristic: Exhibits exceptionally high standardisation. All units are identical, ranging from external signage to customer service protocols.
• Level of support: Benefits from systematic training, comprehensive set-up assistance, and shared marketing initiatives.
• Examples: KFC, McDonald’s, and major international coffee chains.

2.3 Single unit franchise

An incremental step beyond the product distribution model, the single unit franchise grants the investor a license to establish and operate one single retail outlet at a specific, designated location.

• Target profile: Suitable for individual investors or nascent entrepreneurs (start-ups).
• Advantage: Low capital outlay, ease of management oversight, and low concentration of risk exposure.

2.4 Multi-unit / Area development franchise

Corresponding to its nomenclature, this structure authorises the franchisee to expand the scope of their operation, subject to a contractual commitment to open a predetermined number of outlets (e.g., five stores) within a specified geographical area and timeframe.

• Characteristic: Necessarily accompanied by a mandatory Development Schedule.
• Expansion commitment: Failure to establish the required number of units within the designated period grants the franchisor the right to revoke the territorial exclusivity.
• Advantage: Exclusive operational rights within a defined zone, optimising management costs across an enlarged scale.

2.5 Master franchise (Exclusive territorial rights)

This form of international franchising arguably confers the highest level of authority. The master franchisee effectively assumes the role of the primary franchisor within the assigned territory (e.g., the entire territory of Vietnam).

• Rights and responsibilities: Possesses the explicit right to sub-franchise (Sub-franchise) to smaller, individual investors within the specified territory.
• Level of control: Bears full responsibility for brand development and acts on behalf of the parent company to enforce quality control within the local market.
• Advantage: Potential for exponential profits derived from the collection of sub-franchise fees.
• Tran & Co. perspective: This constitutes the most legally intricate structure, necessitating a master franchise agreement drafted with extreme precision regarding Intellectual Property (IP) rights and the development trajectory. Our specialized master franchise strategy service (Package 3) is dedicated to handling transactions of this magnitude.

2.6 Other specialised franchising models

The two models below are commonly adopted in sectors with complex operational requirements or where alignment with an established brand system creates significant strategic advantages.

• Management franchise: The franchisor provides the brand and delegates personnel to manage and operate the business entirely (frequently observed in the high-end hotel industry).
• Conversion franchise: Independently operating businesses transition to affiliate with a larger brand system to leverage its established marketing prowess.

3. Criteria for selecting the optimal franchise structure

The choice of franchise structure should be considered based on the intended purpose, available resources, and a variety of other factors. There is no intrinsically superior form; only the one optimally aligned with the reader’s available resources.

3.1 Resource and capital allocation

If capital is constrained, commencing with a single unit is advisable. If the entity is a corporation with strong financial viability and robust administrative infrastructure, master franchise or area development presents the optimal strategy for comprehensive market dominance.

3.2 Expansion and growth strategy

The preference for rapid or sustainable growth depends entirely upon the investor’s objectives. Product distribution facilitates quick inventory coverage but compromises brand image control. Business Format Franchise achieves slower expansion but ensures enduring brand equity.

3.3 The degree of control and management involvement

Should the investor lack operational experience in F&B but possess prime real estate in a strategic location with a lucrative customer segment, the management franchise (outsourcing operation to the parent company) is a secure, viable solution.

4. Recommended models based on strategic objectives

At Tran & Co. Attorneys, through consulting processes with numerous inbound (entering Vietnam) and outbound (expanding abroad) partners, we have compiled the following guiding recommendations for optimal selection:

• Market testing: Opt for single unit.
• Rapid Expansion in a province/city: Select area development.
• Corporation introducing an International brand into Vietnam: Master franchise negotiation is mandatory.
• Manufacturing enterprise seeking sales channel expansion: Choose product distribution.

5. Critical legal considerations prior to contract execution

Beyond the salient factors concerning growth form, expansion capital, customer segment, and geographic location, adherence to legal procedures and ensuring the Franchisee and Franchisor satisfy contractual prerequisites are pivotal elements determining the long-term sustainability of the Franchise Model and its commercial activities:

• Provisions on rights, obligations, and territory: The scope of geographical exclusivity must be clearly stipulated to preclude internal cannibalisation (internal competition).
• Regulations on sub-franchising: For master franchise agreements, the precise conditions under which sub-licensing is permissible, and the fee-sharing mechanism with the parent company, must be defined meticulously.
• Franchise registration: Pursuant to Decree 35/2006/NĐ-CP, registration of franchising activities with the Ministry of Industry and Trade is obligatory for international franchises entering Vietnam.

6. Conclusion 

A clear understanding of the diverse forms of franchising provides a solid foundation for assured success. Do not permit errors in model selection or oversights in legal contracts to impede your progress. Tran & Co. Attorneys provides specialised consulting packages, including:

• Package 1: Market feasibility and legal risk assessment.
• Package 2: Conceptualisation and connection with potential franchise partners.
• Package 3: Master franchise strategy and transaction structuring.
• Package 4: Drafting and negotiation of bilateral contracts.

Contact the legal team at Tran & Co. Attorneys immediately to receive counsel on structuring the most appropriate form of franchising and safeguarding your investment interests.

Contact information:

• Address: 34th Floor, Landmark 81, 720A Dien Bien Phu Street, Ho Chi Minh City, Vietnam.
• Hotline: +84 765 888 168
• Email: info@tranandcolaw.com
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