Over the last decade the franchise industry has dramatically increased its importance in the Brazilian economy. As of 2014, Brazil had almost 3000 active franchising networks generating more than 1 million jobs.
According to the Brazilian Association of Franchising known in Portuguese as Associação Brasileira de Franchising or simply ABF the franchising sector has been growing 10% to 13% annually for the past decade.
More than 50% of the Brazilian franchising networks have their headquarters located in the state of São Paulo according to ABF. This reflects the geographic distribution of the franchises where 37% of all Brazilian franchises are located in the state of São Paulo.
Brazil has a special law regarding franchises, known as Lei de Franquias, a franchises’ law. According to this law, franchises are granted the right to use the trademark or patent of the franchisors, along with the distribution rights for products or services. It is also possible to include the use of technology or operating systems in order to establish and manage the business, as long as there is compensation for it.
This law obliges the submission of a document named COF or Circular de Oferta de Franquia, the Franchise Circular Offer, which contains specific information about the franchise. It must be presented at least 10 days prior to signing any contract or pre-contract. In this document the following items must be included – the balance sheets and financial statements of the franchisors for the last two years, the total estimated initial investment necessary for the acquisition, implementation and operation start-up of franchising and other information.
The same COF is also required for international franchise agreements, even those governed by foreign law as long as the franchise will be operated in Brazil.
Failure by the franchisor to present a COF in accordance to the Brazilian Franchise Law will automatically entitle the franchisee to annul the agreement and recover any franchise fee, royalties as well as recovery of any damages.
Risk for Franchisors
Franchisees are recognised as independent parties and therefore are responsible for their own actions including the investments in the implementation and operation of its business like any other business.
For support and warranty on the products sold by a franchisee, the franchisor will have the full manufacturer responsibility as the franchisees are simply reselling products supplied by their franchisors. This includes responsibility for possible damages caused by products to consumers.
Training of Franchisees
Another problematic aspect is the recruitment and training of qualified professionals. It is common for the franchisors to providing training to the franchisee through a consulting company. Some franchisors rely exclusively on the franchisee’s Human Resources department to be in charge of the training, but this option is usually not viable for smaller companies with limited staff.
As many of the franchises are related to retail, the turnover and subsequent training costs can be high. Many franchisors will provide assistance and guidance to the franchisees on how to motivate and retain their workforce. The most common incentives for retail franchises in Brazil are sales bonuses and career plan related incentives.