Thursday, May 17, 2012

Franchise Agreements

The Sultanate of Oman features an array of international goods and services providers, many of which are operated as franchises. Eateries such as McDonald’s and Starbucks, retailers such as H&M and Zara are just a few examples of Oman’s thriving franchise sector. Such franchises represent not only an important segment of the Sultanate’s existing commercial landscape, but also a significant opportunity for Omani entrepreneurs to start new businesses.

This article provides an overview of what franchises are and discusses key legal and commercial issues relevant to entrepreneurs looking to start a franchise in Oman, particularly with US franchisors.

What is a Franchise?

Although the word “franchise” often conjures images of particular kinds of businesses – such as fast food restaurants or budget hotel chains – franchising is actually used across a broad spectrum of enterprises. What all franchises have in common are (i) a branded line of products and/or services, (ii) an operating system prescribed by the franchisor, and (iii) one or more fees charged to franchisees for the right to participate in the business system by selling the branded products and/or services and by utilizing the franchisor’s operating system. Franchisors and franchisees are independent business entities, and franchisors typically derive their income from initial and ongoing fees paid by their franchisees. Sometimes franchisors also sell items to franchisees or collect fees from franchisees’ suppliers.

For example, in the case of a fast food restaurant such as McDonald’s, the franchisor, McDonald’s Incorporated, has created and maintains (i) a brand together with intellectual property (e.g., the golden arches logo) and products (e.g., the Big Mac hamburger) associated with the brand, and (ii) a system for operating McDonald’s restaurants, which likely includes detailed guidelines for restaurant layout and decoration, food preparation guidelines, customer service guidelines, and many other requirements. McDonald’s franchisees, namely the businessmen and companies that own and operate McDonald’s restaurants throughout the world, pay franchise fees to McDonald’s Incorporated in exchange for the right to use McDonald’s Incorporated’s brand and operating system.

The legal framework for franchising in Oman

In some jurisdictions, there is a separate legal framework that governs franchises. However, in Oman franchises are simply considered another form of commercial agency. Accordingly, franchise agreements, like any agency or distribution agreement, are governed by Oman’s Commercial Agency Law, unless the agreement is expressed to be governed by the laws of a country other than Oman, coupled with an arbitration clause.

To form a legally valid franchise relationship in Oman, it is necessary for the franchisor and franchisee to enter into a franchise agreement and to register in the Commercial Agents Registry at the Ministry of Commerce & Industry.

The franchise agreement is naturally a very important document to the franchisor and the franchisee alike. Although the franchise agreement will usually be based on the franchisor’s standard form, it is important for the franchisee (and, we recommend, the franchisees legal advisors) to review the franchise agreement carefully and negotiate its key points with the franchisor. From the perspective of an Omani franchisee, the key issues are likely to be:

  • the fees that the franchisee will be obliged to pay to the franchisor;
  • the services that the franchisor will provide to the franchisee (for example, training and marketing support);
  • the scope of the franchise rights (for example, geographical reach);
  • the reasonableness and attainability of any performance targets or restrictions that the franchisor may impose on the franchisee;
  • whether the franchisee is being appointed on an exclusive or non-exclusive basis; and
  • the governing law and jurisdiction clause.
Franchise Disclosure Documents (FDDs)

Every prospective franchisee would do well to obtain detailed information about the franchisors that interest him. Fortunately, when it comes to US franchisors, this information is fairly easy to come by.

US franchisors are required to deliver Franchise Disclosure Documents (FDDs) to prospective franchisees for locations within the US, although this requirement does not apply abroad. Franchise laws in twenty other countries also require franchisors to prepare FDDs. FDDs contain invaluable information about the experience of the franchisors and their executives, including the number of units of the franchise opened and closed in recent years, litigation and bankruptcy history, initial investment estimates, audited financial statements of the franchisor, and contact information for the franchisor’s current franchisees, as well as those who have left the brand during the franchisor’s last fiscal year.

Every prospective franchisee should study the information required to be included in the FDD, however US franchisors are often advised by their lawyers not to provide the FDD to foreign franchisee prospects because international franchise agreements usually differ from the US domestic agreements, and the laws of most countries, such as Oman, do not require them to make such detailed disclosures. Franchisors may also fear that if they have no experience in operating businesses in a new market, such as Oman, that a US-oriented FDD could mislead prospective Omani franchisees. Nevertheless, we strongly recommend that an Omani franchisee should demand and examine the franchisor’s FDDs prepared for the US market, as these documents will contain useful information that the prospective franchisee can use in evaluating specific franchise opportunities.

Other recommendations

In order to take advantage of the best available franchising opportunities and to avoid problems with inexperienced or undercapitalized franchisors, prospective Omani franchisees should consider the following:

  • Only acquire a franchise if you are comfortable with the franchisor, the people who lead it, and its organizational culture.
  • Obtain an FDD of the franchisor, even if it is prepared for the US market. Many FDDs are available online. Many franchisors prepare international or country-specific FDDs and will normally provide them to prospective franchisees without their having to ask.
  • Contact unit franchisees in the US and elsewhere. Many franchisees are willing to share information about their experiences with prospective franchisees.
  • Although franchisor executives describe franchising as a relationship which is a form of partnership, franchise agreements are complex documents which define the relationship and carefully define the rights, duties and remedies of franchisees. A lawyer with a sophisticated understanding of international franchising can help you to understand, evaluate and negotiate a franchise agreement.
  • Be wary of a franchisor that is willing to make substantial modifications to its franchise program for the sake of concluding a deal. Franchisors should have a business plan for your market, and should demand that you present them with a business plan of your own before reaching agreement on a franchise relationship.
  • Check out other resources at and also check with the US Foreign and Commercial Services at the US Embassy in Muscat for information about evaluating US franchisors offering franchises in Oman.