What is franchising and how it works in the Czech Republic

Quick overview

• Franchising means that you run a business on your own, but under someone else’s brand and according to the rules of the brand owner.
• Typically, you pay an initial fee, ongoing licensing fees or commission, and get the right to use the brand, know-how, operations manuals, marketing and support from the franchisor.
• In the Czech Republic, this is not a separately regulated contract type, so a contract is essential: it must clearly address fees, license, territory, control, marketing, confidentiality, penalties and termination of cooperation.

Before you sign a franchise agreement, be sure to have it checked by a lawyer. This is because a franchise is often not just a single license, but a long-term commitment that can affect your entire business.

Franchising, or franchise, can be defined as a business model that allows individuals or entrepreneurs (franchisees – franchisees) to own and operate their own businesses using the license, brand, products and systems of an established company (franchisor). The franchisor thus grants the franchisee the right to use its license, business model, trademarks and support services in exchange for a fee or commission.

Basic components of franchising

• Franchisor: This is an established company that owns the license, brand and business model. The franchisor provides the franchisee with the necessary tools, training and ongoing support to run the business using its brand.
• Franchisee: A franchisee is an individual or business entity that purchases the rights to operate a franchise unit. They are responsible for managing the day-to-day operations of their franchise business.
• FranchiseFee: The franchisee typically pays an initial fee to the franchisor for the right to use the brand and business model. This fee can vary widely depending on the franchise.
• Ongoing fees: Franchisees often pay ongoing fees to the franchisor, usually calculated as a percentage of their sales revenue (i.e. commission). These royalties support the continued use of the brand and access to the franchisor’s support services.
• Training and support: franchisors offer training programs and ongoing support to help franchisees learn and effectively implement the business model.
• Brand Standards: Franchisees are expected to adhere to the franchisor’s established standards for product quality, customer service and overall business operations.
• Territorial exclusivity: Franchisees may be granted territorial exclusivity, which means they have the exclusive right to operate the franchise in a specific geographic area.
• Marketing and advertising: Franchisors often coordinate national or regional marketing efforts to promote the brand, and franchisees may contribute to these efforts through advertising fees.
• Independence of the business: Even though franchisees operate under the brand and must follow the franchisor’s guidelines, they are still independent entrepreneurs and are therefore solely responsible for their success or failure.

Advantages and disadvantages of franchising

Franchising has its advantages and disadvantages, and whether it is a good business model for you depends on your goals, resources and preferences.

We know from legal experience that prospective franchisees often focus on the brand and expected revenue, but undervalue the contract itself. It is the contract that contains the greatest risks: high contractual penalties, mandatory subscriptions, unilateral changes to manuals, limited ability to terminate the cooperation or the obligation to pay fees even when the branch is not doing well.

Here are some of the key advantages and disadvantages of franchising:

Benefits of franchising

• Established brand: You benefit from the recognition and trust associated with an established brand, reducing the time and effort required to build a customer base from scratch.
• A proven business model: franchisors have a well-documented and proven business model that will increase your chances of success compared to starting a business from scratch.
• Training and support: franchisors often provide comprehensive training programs and ongoing support, helping franchisees with everything from operations to marketing.
• Savings: As part of a larger network, you usually have access to better prices on supplies, equipment and marketing materials due to the collective buying power of the franchise system.
• Marketing and advertising: Many franchises run national or regional marketing campaigns that benefit you as well. In addition, you may receive marketing materials and guidance from the franchisor.
• Territorial exclusivity: Depending on the franchise agreement, you may be granted territorial exclusivity, reducing direct competition from other franchisees of the same brand.
• Lower risk: Compared to starting an independent business, franchising is less risky because you are operating under a proven model and brand.

Disadvantages of franchising

• Cost: Franchise fees, royalties and other ongoing payments to the franchisor can be significant and potentially reduce your profitability. Typical mistake: the franchisee calculates the initial fee and rent, but forgets about recurring royalties, marketing contributions, mandatory equipment, subscriptions from designated vendors, and the cost of modifying the establishment according to the franchisor’s manual.
• Lack of independence: even though you run your own business, you must adhere to the franchisor’s rules and standards, which greatly limits your creative control and flexibility.
• Limited Growth Potential: The franchisor may impose restrictions on your ability to expand or diversify your business beyond its brand.
• Shared reputation: If other franchisees or the franchisor itself encounters negative publicity or problems, it can affect your business’s reputation, even if you are doing well.
• Contractual Obligations: Franchise agreements are legally binding contracts and violating the terms can have serious consequences.
• Ongoing Expenses: In addition to royalties, you may be required to contribute to marketing and advertising funds and other ongoing expenses as defined in your agreement.
• Limited Innovation: Some franchise systems have fixed standards that may limit your ability to introduce new products or services or to adapt to local market conditions.

Not sure if the fees, penalties or restrictions in your contract are reasonable? Have a draft contract reviewed before you pay an upfront fee or commit to subscriptions, marketing contributions and long-term branch operations.

How franchising works in the Czech Republic

The Czech Republic does not have a specific legal framework for franchising and therefore there is no official franchise agreement. Different legal provisions apply to franchise agreements depending on what the agreement contains. Usually, these include provisions on a purchase agreement, a mandate agreement and a licence agreement. Different parts of the Civil Code also apply, specifically, for example, liability for damages, contractual penalties and confidentiality of confidential information.

In practice, it is therefore not sufficient to check whether the contract contains the word “franchise”. It is important to go through the whole contractual mechanism: who can use the brand, under what conditions the franchisor can change the rules, how fees are calculated, when the contract can be terminated and what happens to the premises, stock or customer database after the end of the cooperation.

In addition, franchise agreements are subject to European Union competition law , which deals with intellectual property and copyright. Finally, a general pre-contractual information obligation applies to franchise agreements to ensure that both parties are aware of all the circumstances.

What should the franchise agreement contain

As mentioned above, there is no official franchise agreement, so the content of the agreement is partly up to the parties themselves. The provisions that every franchise agreement should contain are set out in the European Code of Ethics for Franchising. However, there are other parts that should not be missing from a franchise agreement:

1. Definitions: clear definitions of key terms used in the contract.
2. The rights and obligations of both parties: In the case of a franchise agreement, this usually includes the franchisor’s obligation to provide the licence, trademarks, business model and other components of the franchise. The franchisee, in turn, has an obligation to comply with the rules and pay fees.
3. Franchise concept: The contract should spell out the specifics of the franchise.
4. The term of the contract: The contract should have a clearly stated term, which may be definite or indefinite. It should also specify the conditions under which it can be renewed or terminated.
5. Fees: The contract should clearly state the amount of the initial fee and how other fees will be paid (for example, whether they will be commissions or fixed annual fees).
6. Marketing: the franchisor gives the franchisee rights to its marketing strategies, while the franchisee may have prescribed standards and requirements to follow in terms of product quality, customer service, hours of operation, etc.
7. Training: an overview of the training and support services provided by the franchisor, including the duration and location of training programs.
8. Territorial Exclusivity: A description of the geographic territory in which the franchisor may operate, including any exclusivity or restriction on competition.
9. Control: The franchisor may establish the right to control the franchisee’s work.

Practical Example: An entrepreneur wanted to take over a franchise branch in the restaurant business and was mainly concerned with the initial investment. However, the contract also included mandatory monthly marketing fees, the franchisor’s ability to unilaterally change the operations manual, and a hefty penalty for violating brand standards. After a legal review, it was possible to define more precisely what the fine could be imposed for, to add a time limit for correction and to modify the rules for terminating the cooperation. The outcome always depends on the specific negotiation, but these details often determine whether a franchise is viable in the long run.

Which companies offer franchising

The most common franchise opportunities fall into several key categories and industries. These industries tend to have a high prevalence of franchising due to their established business models, brand recognition and consumer demand. Here are some of the most common types of franchises:

• The most well-known and common franchises include the hospitality industry. The fast food franchises you’ll come across most often are McDonald’s, Subway, Ugo and Burger King. But there are also a number of coffee shops, which include Starbucks, Kofi Kofi and Trdlokafe.
• Diners, petrol stations and retail outlets such as the Flop retail chain, Relay newsagents and the OMV petrol station chain.
• Hotels and motels, including brands such as Hilton and Pytloun Hotels, offer franchise opportunities.
• Fitness chains such as BodyBody, Body Express or Contours fitness for women.
• Some real estate agencies and property management companies also offer franchise opportunities. In the Czech Republic, these include RE/MAX or Century 21.

Franchising offerings in the Czech Republic include dozens of different brands across industries – from fast food to fitness to real estate. It is an interesting business model with advantages and disadvantages. On the one hand, you get access to an established brand and a proven business model. On the other hand, franchising can mean high costs and limited independence. In addition, it should be taken into account that there is no specific legal regulation of franchising in the Czech Republic, so it is crucial that the franchise agreement contains clear provisions regarding the rights and obligations of both parties, fees and other aspects. It is also important to carefully consider your objectives and resources when deciding on a franchise. Every franchise offering is different, so it is important to carefully examine whether a particular franchise system fits your goals, opportunities and business style.

Summary

Franchising is a business model that allows entrepreneurs to operate their own business under an established brand and using licensed know-how. In the Czech Republic, there are no specific legal regulations on franchising and therefore general legislation – mainly the Civil Code and selected parts of EU law – apply to franchise agreements. Franchising has a number of advantages, such as lower risk, support from the franchisor and a strong brand, but also disadvantages in the form of high fees, limited independence and contractual obligations. The franchise agreement should clearly define the rights and obligations of both parties, fees, marketing rules and territorial exclusivity. Franchise offerings in the Czech Republic cover a wide range of industries – from fast food and coffee shops to fitness and real estate – and when choosing, it is crucial to carefully assess whether a particular system fits your business goals and opportunities.