The Legal Framework on Franchises in Nigeria

You might be seeking to go into a business in Nigeria with a good product or service offering, but you are unable to do this either because:

– You lack the specific licence needed to engage in that particular line of business (very common in the Tech sector).

– You lack the marketing budget to create the right amount of brand awareness for your business.

– You are up against already well established brands in your planned line of business.

– You’re a Non-Nigerian based abroad and you cannot relocate to Nigeria or go through the process of registering and running a foreign company in Nigeria as you intend to set up your business in other countries as well.

– You lack the resources (financial and otherwise)needed to set up your business.

This is where you will be needing what is known as a franchise, which is best suited for start-ups and entrepreneurs seeking relatively immediate market share acquisition in the form of an ready-made pool of customers.

This is what this write-up will be looking at and treating, with its main subtopic focus areas being :

– What a franchise is.

– The legal framework governing franchising in Nigeria.

– The types of franchises and franchising models in Nigeria.

– The necessary components of a franchising agreement .

What is a Franchise?

This is legal mechanism for business expansion involving a party known as a franchisor (usually a well-established company with a registered Trademark, Business license, and Business system), granting another party known as a franchisee the right to use its trademarks and business name in exchange for usually an initial fee, royalties, or/and a share of the franchisee’s profits.

Think of it this way. You are a Techpreneur with a Saas (Software as a Service) that can rapidly process payments while automatically sending SMS transaction notifications to a foreign-based vendor and the buyer based in Nigeria at the same time, and you’re confident it will be a commercial success, but you lack the Business prestige and funds to secure a Payment Processing Service Provider licence from the Central Bank of Nigeria.

You can simply enter into a franchising agreement with a licensed Electronic Payment Processing Service Provider like Paystack to operate as a different brand offering while legally fronting as a subsidiary or service brand variant of Paystack in exchange for royalty payments or a back-end profit sharing arrangement.

Franchising arrangements are possible in almost every commercial sector and are a good market entry tool for start-ups and Nigerian subsidiaries of well-known International brands.

What is the legal framework governing franchises in Nigeria?

Currently, the general laws governing Intellectual Property (especially on technology transfer)in Nigeria also apply franchises as well as Franchising agreements in line with the laws of contract in Nigeria as there’s no specific law on franchising.

What are the types of franchises & franchising models in Nigeria?

The following franchises can be found in Nigeria :

– Job franchises :- Usually involving sole proprietor-business models that consist of low-level investments via the purchasing of basic equipment, product stock and mobile product support such as a bicycle e.g. Fan Yogo Bicycle men and 1-man Sports-betting centres.

– Product/Distribution franchises :- Which involve using the franchisor’s Trademark without any further Business supporting structure e.g Tire Wholesale centers and Computer retailing centers.

– Business format franchises:- This is a franchise system that relies on the use of the franchisor’s trademarks and his business system to market the product e.g. Fast-food franchises and membership fitness centers.

– Investment franchises :-Franchises under this category usually involve large investments by the franchisee and might require the franchisor’s management for the purpose of ensuring returns on investment e.g. 4-5 star hotel franchises, Mall franchises.

– Conversion franchises :- This involves the converting of Independent business units via franchising agreements that can be framed as strategic partnership agreements involving Trademark adoption by the franchisee as well as training systems, advertising programs and critical client service standards among other things. e.g. Professional service firms such as Deloitte (which for a while operated as Deloitte Akintola Williams).

With regard to Franchising models in Nigeria, the following types also exist :-

– The Master Franchising model :- Which involve a franchisor (or Master Franchisor)  grants another party called the Master Franchisee the right to operate its business in a given area of operations through a Master Franchise Agreement (MFA), enabling the Master Franchisee the right to grant sub-franchises to 3rd parties with a given geographical area, making the Master Franchisee an actual Franchisor for that territory e.g Kentucky Fried Chicken Nigeria.

– The Multi-unit/Area Development Franchising Model:- Which involve the grant of a franchise authorizing the Franchisee to open several business units or outlets in a given location e.g. The SPAR retail supermarket chain spread across various states in Nigeria.

– The Direct Franchising Model:- Which involves the grant of not more than a single franchise to a Franchisee in a given area e.g. Quick Service Restaurants like Mr.Biggs.

– The Management Franchising model :- This involves a developer franchisee needing operational skill set experience for the purpose of day-to-day operations of the business and subsequently hiring specialist management (which may be seconded by the Franchisor), a franchise model common with International Courier companies and Hospitality brands.

What are the key clauses to look out for in a franchise agreement?

The following clauses in a franchise agreement are to be carefully worded :

– The Restraint of Trade clause :- which must be inserted in a franchise agreement which will prevent a Franchisee from in the future being able to use trade secrets gotten from the Franchisor in a competitive capacity after the expiration of the franchise agreement.

– The Labour issues clause :- This clause must be worded to indicate that all issues relating to staff recruitment, remuneration, training and laying off are strictly within the jurisdiction of the franchisee, otherwise Joint Employer liability will be traced to a Franchisor in the event of a Labour or Industrial dispute.

– The Brand protection clause :- The use of the Franchisor’s intellectual property (Trademarks, Patents, Design Rights, Merchandise Marks, Copyrights, etc.) must be carefully defined and before signing the franchise agreement in the case of the franchisor being an International company,must have been registered in Nigeria.

Conclusion :- The issue of Franchising, even in the absence of a dedicated Legal framework, still requires a lot of Professional guidance to set up from advisory work & intellectual property registration to documentation and compliance measures. Further guidance on this topic can be gotten through sending a further consultation enquiry to [email protected] or 07011261897.