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Franchise agreements in Brazil
by Felipe Barreto Veiga (BVA Advogados) and Fabio Kujawski (Mattos Filho Advogados)
According to data from the Brazilian Franchising Association (ABF), the annual revenue of the Brazilian franchising sector exceeded R$ 103 billion in 2012, an amount almost four times higher than the R$ 28 billion generated by the sector in 2002.
These are impressive figures but they clash against the new reality of this market: if before the possibility of investing in a franchise was restricted to the wealthiest part of the Brazilian population, the increase in the number of franchises requiring lower start-up investment from their franchisees ended up significantly changing the profile of entrepreneurs of this sector.
Another fact that may have contributed to the Brazilian interest in the franchise sector is the business risk: according to a research conducted by the Micro and Small Business Support Service (Sebrae)(1), the mortality rate of ordinary companies with up to two years of existence in Brazil has remained around 25%, whereas during the last decade, the mortality rate of companies involved in any kind of franchising has revolved around 5% during the first three years of the business, according to data from ABF.
This fact shows the vigor with which franchised companies manage to face the peculiarities of the Brazilian market. In the words of Maria Helena Diniz, “franchising is advantageous for both parties inasmuch as it allows the franchisor to expand his or her business with little investment while allowing the franchisee the opportunity to be his or her own boss, to be the owner of his or her own company, at far lower risks than the risks faced by those who venture into their own business without counting on the help of someone with experience who owns a leading brand.” (2)
The relationship between franchisor and franchisee is based on a franchise agreement that stipulates the conditions for the distribution of products and/or services in association with a license to use the trademark and know how, subject to compensation and without an employment bond – as is the case in employment relations.
Franchise agreements are subject to Law No. 8,995 (Brazilian Franchise Law) and aims at building a relation of cooperation, consolidation of the franchise trademark, increase of market share, and economic gains for both the franchisor and the franchisee.
The most important provision of the Franchise Law relates to the Franchise Offer Letter, which has to be delivered to the potential franchisee, at least ten days before the execution of the franchise agreement.
Such document must contain a very extensive host of information to the franchisee about the proposed business for the purpose of allowing potential interested parties to obtain more detailed knowledge on the products and services covered by the franchise, brand-related issues, the franchisor’s financial health, investments required from the franchisee, among others.
As mentioned before, the franchisor’s failure to comply with the obligations related to the Franchise Offer Letter may cause the agreement to be null and void and may lead to the return of all royalties that may have been paid by the franchisee.
(1) In: http://www.sebrae.com.br.
(2) DINIZ, Maria Helena. Tratado teórico e prático dos contratos. 6. ed. São Paulo: Saraiva, 2006. 4. v, p. 50.
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