10 February 2013

Ethiopia: Franchise Influx Requires Legislative Demand


One of the upshots of the expanding Ethiopian economy is the emergence of vibrant private businesses. Enterprises that ploddingly survived for a long time have now developed a dazzling amount of success.

This amity produces strong trust in the market, which in turn cultivates a demand that outflows the supplying capacity of the successful proprietor. Various types of arrangements have been devised through the years to meet the excessive demand for goods and services.

A franchise arrangement, where one party grants another party the rights to use its trademark or trade-names, as well as certain business systems and processes, for instance, involves producing and marketing a product or service, according to certain specifications, in return for a fee. From the perspective of the franchisee, franchises offer an opportunity to lawfully use intellectual properties that belong exclusively to the franchisor.

The concept of franchising originated in theUnited States. Isaac Singer, who made improvements to an existing model of sewing machine in the 1850s, began one of the first franchising efforts.

However, modern franchising came to prominence with the rise of franchise-based food service establishments. In 1932, Howard Johnson established the first modern restaurant franchise. The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee.

TheUnited Statesis a leader in franchising, a position it has held since the 1930s when it used the approach for fast-food restaurants, food inns and, slightly later, motels, at the time of the Great Depression. On the other hand, franchising inEthiopiais at an infantile stage. But, recently, the thriving economy is driving up the number of both local and international franchised businesses.

Indeed, franchises help the Ethiopian economy by assisting the private sector in flourishing and creating job opportunities. For instance, as of 2005, there were 909,253 established franchised businesses in theUnited States, generating 880.9 billion dollars of output and accounting for 8.1pc of all private, non-farm jobs. This amounts to 11 million jobs, 12pc of theUnited Statesprivate sector workforce and 4.4pc of all private sector output.

Intellectual property rights that can be licenced through franchises include; patents, designs, trademarks, copyright, know-how, trade secrets, customer lists, formulas, business methods, personnel training and manuals. The objective of licencing is, almost invariably, to commercially exploit technology or intellectual property.

The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as a royalty, and gains in return; immediate name recognition, tried and tested products, standard building design and décor, detailed techniques in running and promoting the business, training of employees, and ongoing help in promoting and upgrading the products. The franchisor gains rapid expansion of the business and earnings at minimum capital outlay.

Giant transnational companies are finding it easier to reach millions of new customers through franchises. McDonald's, for instance, is a premier franchise company around the world, with more than 37,300 partners, in 2010, accounting for 80pc of its restaurants worldwide.

Franchises are nothing but a licence allowing a person or company to use or sell specific products in certain areas according to an agreement. A franchise can be exclusive, non-exclusive or 'sole and exclusive', regarding the territorial use or the content of the licence. A franchise is a readymade form of business, seeking expansion in new market areas with the help of local representatives.

As a franchise business is already set up by the franchisor, the initial investment required by the franchisee to enter and establish itself in the market is relatively low. A good reputation for the business is already established in other areas and so the franchisee does not need to put in a lot of effort to enter new markets.

By establishing outlets in different parts of the world, franchising helps the owner of the firm to diversify his business risks.

Thirty three countries, including; the United States, China and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws that have a direct or indirect impact on franchising.Ethiopia, like theUnited Kingdom, does not have a separate franchise code. Most of the legal rules that govern franchise agreements are located in various statutes issued on intellectual property rights, trade practice laws and the codes issued in the 1960s.

Given the large size of the Ethiopian population, coupled with its surging prosperity, successful businesses in the future will attract momentous demand for their goods and services, locally and abroad, which will result in the increased importance of franchise arrangements for the nation.

For the successful absorption and smooth functioning of franchise businesses, however, a separate and comprehensive code that governs the agreements is preferred to the existing clauses, which are found flung in different legislations, making enforcement difficult.

 Tagel Getahun is an advocate in law. 

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