A franchise is a license given by a business owner with a view of providing its brand, operational model and required support to another party to use and run a similar business for a fee and/or some share of the income generated.
Generally, franchising is usually meant to expand businesses and distribute goods and services to meet higher consumer demand where the original owner, for various reasons, is unable to reach. It is based on a relationship between the brand owner and the local operator to extend an already established successful brand into a local market.
In Tanzania, there are many well established franchises that exist and that are spread out in different sectors of the economy and in different parts of the country. Names like Subway, KFC, Pizza Hut, Epidor, Spurs and Marry Brown are common in the local market. As a result, this is not a novel commercial undertaking as it may seem to be.
A franchise is set up by the franchisee purchasing a franchise from the franchisor. The business of franchising has become transparent that one finds online sites advertising or offering to sale franchises anywhere in the world, including Tanzania. Thus, for one seeking information on franchising, this is a good place to collate information leading to setting up a franchise of a popular brand in the local market.
The procedures for setting up a franchise will normally be regulated by the law of the jurisdiction in which the franchise will be set up. In Tanzania, all legal contractual relationships are governed by the primary law, that is, the Law of Contract Act, Chapter 345 of the laws of Tanzania. Other laws as listed below may come into effect conditional upon the nature and scope of the franchising.
Normally, the franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases, the franchisee must pay an ongoing franchise royalty fee to the franchisor. Essentially, the royalty fee is an ongoing payment a franchisee makes to franchisor after buying into a franchise. It is also can be viewed as a membership fee for the duration of the franchise.
For a valid franchise to exist, parties who have the intention of creating a legal relationship must enter into a franchise contract with a view of stipulating the nature, terms and conditions of the franchising.
A franchise contract is a legal commercial document governed by the same legal principles as any other contract. In this contract, the franchisor sells its rights to use its name or brand to the franchisee. The franchisee is granted, among others, the license to do business under a franchisor’s trademark and business model and specifications in certain area. That is to say, a franchise creates a franchisor-franchisee contractual relationship between a licensor (the franchisor) and a licensee (the franchisee). Franchise arrangements are also subject to certain limitations and conditions, limited to some places and in some kinds of services such as transfer of services, courier, food supply services just to mention a few.
Further, a franchise contract defines the obligations and rights of each party regarding the franchise relationship. Normally, a franchise contract will have the following terms: -
The governing laws for franchising in Tanzania are primarily, and not limited to: -
There are several advantages of setting up a franchise. It is a very quick route to the unlimited opportunities available in the business world. This is simply because for startups, building a successful brand and marketing it into a world class outlook, takes a lot of effort and sometime luck. Franchising makes it less expensive in terms of the capital and technology needed, employees and several expenses in line with the opening of a business but through this type of arrangement, entrepreneurs tend to expand without bearing the risk of debts and costs.
Much as there are advantages, there are also disadvantages. For instance, franchisors dictate how franchisees runs the business, since a franchisee can only perform services (as set in the franchise contract) provided by that particular original business (franchisor), so there may be little room for creativity or deviation. There are in full control so that the franchisee doesn’t impair the value of the brand. On the other hand, a franchisee is faced with constant business pressure from the sector industry to keep up with the market competition and maintain the status of the brand and/or business during the period of the license.
Lastly, franchising is an attractive undertaking for any entrepreneur as it provides a ready and tested business model coupled with brand value. In that regard, entrepreneurs in Tanzania should be open to these investment opportunities.
By Linda A. Soko
Kilindu Giattas & Partners
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
