The market for franchising it grew by around 6 % in Brazil in the last semester compared to the same period in 2018, according to data from ABF [1]. And the Legal Framework for Franchises (Law nº 13,966/2019) came as a welcome, introducing new features for the sector. Given this, I usually anticipate and say that franchisors who already adopted the best practices of transparency and clarity in information about the business offered will have fewer headaches, but they must also pay attention to the new rules.

[1] The Quarterly Sector Performance Survey, developed by ABF, showed a nominal growth of 5.9% in the second quarter of this year compared to the same period in 2018. Revenue increased from 40.734 billion reais to 43.122 billion. In the semester, the increase was 6.4% (79.496 billion reais to 84.586 billion). The revenue accumulated in the last 12 months expanded by 6.9%, from 168.360 billion reais to 179.933 billion.(https://exame.abril.com.br/pme/mercado-de-franquias-cresce-ha -20 years/)

Then the main doubts arise that involve 4 simple questions: When? Who? What? It is like?

When? The new law comes into force from March 27, 2020.

Who? All franchise businesses signed in Brazil must comply with the new rules, in particular, the Franchise Offer Circulars – COF, pre-contracts, contracts, as well as contractual renewals that are issued from that date onwards, which have already the required modifications must be included.

What? The law brings good and new changes: some were already included in the old legislation, but were outlined in detail in the new text; others were adopted by the market as good practices, and were included as a law; and finally, we have the true innovations brought by the law.

To calm distressed hearts, I will list below the main points that must be observed by franchisors and franchisees with the new law in force:

Legal declaration that it is not a consumer relationship: despite already being a peaceful understanding in national courts, the law resolved any doubts that still existed on the subject, making it clear that it is a business relationship, governed by its own law, and not covered by the scope of consumer law;

Lack of link between franchisor and franchisee employees: Again, the law adopted the position of the courts, in order to make it clear in its text that there is no work or employment relationship between the franchisor and the franchisee and/or between the franchisor and the franchisee's employees, even during the training period ;

COF

The Franchise Offer Circular, which is the document that introduces the main information about the franchised business, already had its importance highlighted by the previous law. However, the legal framework brought a greater obligation to the franchisor in terms of detailing business implementation information.

These include, for example, an indication of the support and services provided by the franchisor, franchise manuals, the time, costs and type of training provided, assistance in choosing the point, the rules of territorial operation and limitation of competition between the franchisor and franchisee, bringing the need for forecasting about the franchisee's territory of operation (a very important point, including in the face of competition with e-commerce channels, which has been growing exponentially); what technological innovations are provided, and details on the layout and architectural pattern of the facilities, all in a more specific way.

Furthermore, the rules for succession and transfer of the franchised commercial point, as well as the purchase of inputs and products from suppliers, which must now be obligatorily indicated in the COF in a specific way, including the refusal of products and the acquisition of minimum quotas.

In other words, to be simple and direct, the law determines that the COF brings in a well explained all support and rules of the relationship between franchisee and franchisor. I would even say that, if the franchisor does not offer something that the market usually offers, it is interesting to mention that which is not included, or which is charged separately, leveling the franchisee's expectations. Anyway, the idea for the new COF can be summed up in one sentence: it's not enough to mention that what you offer, you have to DETAIL. This is the slogan for the new law.

On the same subject, the prior presentation of the COF 10 days in advance remains mandatory, now under the penalty – foreseen in a literal way – of annulment of the legal transaction, with refund of the amounts spent by the franchisee. Here lies the difference: the old law allowed the claim for losses in damages, but today, the text only talks about the refund of amounts plus monetary correction.

Also, be aware that the law provides for the imposition of administrative fines on franchisors who fail to present legal information in the COF.

New Type of Rental Contract

The legal innovation introduced by the law aims to safeguard the commercial location for the franchisor, by allowing subletting to the franchisee, including at values different from those negotiated with the owner, also granting the franchisor legitimacy for the renewal action. I will purposely leave aside legal discussions on leasing matters, and focus on the intention of the law, which was to establish the commercial point as an asset of the franchisor, and no longer the franchisee.

This, therefore, is a point of pure legal innovation, which brought more protection to this intangible asset, of great value in the retail market. The issue here will be in practice, as in addition to doubts and clashes with leasing law, the franchisor may have to assume rental liabilities, which is one of the first signs that the business is not going well. Even more so when the point is “no more” for the franchise investor. This can be a harsh reality, as the franchisor will eventually have to deal with the rental debt in addition to defaults on royalties and franchise fees when the unit fails.

So, if the focus is to think about adding value to the intangible assets of the franchise network, increasing the valuation of the business, franchisors have a very cool option, but they must eventually prepare for the contingency of liabilities.

State companies and non-profit entities can have franchises, regardless of the sector in which they carry out activities: The sector gained more strength when it made it possible for public sector companies to franchise their services. This is another point of cool innovation. I reserve criticism for the administrators on duty, but I see it positively, as long as, of course, the implementation of this rule respects the constitutional reservations provided for administrative contracts. Ultimately, the law has good intentions (hell is paved, come on), and actually intends to make the national market more attractive to foreign investment.

We will find out later, when the text is, in practice, the daily life of the market and the courts.

And finally, how?

Well, in addition to being the time to review all legal documents for your franchised business (because the law says so), it becomes the timing It is ideal for the franchisor to review the management of the franchised business, evaluate its franchise network, as well as the entire structure offered, in addition to being a great time to renew (or not) vows with its franchisees.

Mariangela Bavaresco, is a lawyer and business legal consultant, L.LM from the University of California – UC Davis School of Law, MBA in Strategic Business Management from Isae/FGV, and has been working in the area of business law for 15 years, focusing on advising on structures contractual and corporate issues, including for retail.

Alessandra Tortelli

Alessandra Rech Tortelli is CEO of Conex Negócios, graduated in Administration and has an MBA in Retail Management, Franchise Management and Omnichannel Retail. She worked as an internal consultant and manager of large companies, such as: Tintas Renner, Arezzo, Portobello Shop, Mormaii, Confecções Brandili, etc., in 2010 she founded Conex Negócios, a consultancy company focused on Structuring and Expansion of Companies, she is also a speaker, teacher and creator of the startup ConexHub. Alessandra loves challenges and being connected with entrepreneurs, promoting exchanges, experiences and knowledge. She believes that we are all interconnected, that the challenge of one is the challenge of all!