How to Structure A Franchising Agreement in Turkey

Franchise

Franchise sector in Turkey has been in a rapid growth in the recent years. As of 2014, there were approximately 1850 chain of enterprises in Turkey, 24% of which are foreign trademarks and the number of foreign investors intending to franchise in Turkey has been increasing year by year. Especially food, fast-food, service and textile are promising sectors in Turkey, that have been the most preferred areas of investment for franchising so far. Young and growing population, new investments in shopping centers and real estate, legal and financial opportunities and incentives for investors, falling inflation rate and a rapid growing international trade volume play an essential role and attract investors’ interest in Turkish market.

Franchise Agreements

As a result of the decrees of 24 January 1980 which were issued with an intention to increase import and export volume within the scope of the rising liberalization and incentives in different aspects in the country, Turkey started to become a center of attraction in franchising. In order to develop the franchising system in Turkey, the National Franchising Association (“UFRAD”) was established in 1991, which has been supporting franchisors since then in their investments abroad and helps by credit, leasing and banking intermediations.

Under Turkish laws, franchise agreements are not regulated under a specific category, rather it is regarded as a mixed type of contract. In practice, provisions of Turkish Commercial Code on agency agreements are applied to franchise agreements due to certain similarities between the two. Depending on the terms agreed by the parties, provisions of Turkish Commercial Code and further relevant legislation pertaining to other sorts of business deals may also apply, such as commissionaire.

Structuring a Franchise Agreement

In general, franchise agreements consist of two parties as the franchisor and franchisee. Franchisor vests license rights to the franchisee and supports the franchisee continuously during its business activity, whereas the franchisee undertakes to pay a franchise fee and a royalty to the franchisor, by supporting the franchisor’s sale of products or services. During its business activity, franchisee adapts the franchisor’s system exactly and abide by the franchisor’s instructions. Royalty amount varies on the franchisor.

We may classify the types of franchising as below;

  • Master franchising
  • National and international franchising
  • Operating system franchising
  • Product and brand franchising
Franchise Agreements under Turkish Competition Law

Generally, franchise agreements include provisions limiting competition for both contracting parties. Based on the principle of contract freedom, parties may settle exclusivity principles where the franchisor undertakes not to grant franchising to third parties in the relevant territory and franchisee undertakes to use its franchising rights solely in that territory during the agreement period and for a certain period after the termination thereof.

Franchise relation constitutes a “vertical agreement” in Competition Law terms. As in the case with many of the vertical agreements, franchise agreements usually include vertical limitations on the subjects of exclusivity, competition, intellectual property and confidentiality.

In principal, vertical agreements are subject to the prohibitions set forth under Article 4 of Law on the Protection of Competition (“Law”), which may be lifted via Block Exemption communiqués or individual approvals of the Turkish Competition Board.

According to the said Article 4 of the Law;

“Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited.”

Exemptions to this provision are set forth in Article 5;

“Competition Board …. may decide to exempt agreements, concerted practices between undertakings, and decisions of associations of undertakings from the application of the provisions of Article 4…”

Based on its authorization granted via above provision, the Competition Board issued several communiqués, among which, the ones related with franchising are the “Communiqué on Block Exemption for Vertical Agreements numbered 2002/2” and “Communiqué on Block Exemption of Technology Transfer Agreements numbered 2008/2”.

As per the Block Exemption Communiqué on Vertical Agreements, prohibition of competition can only be stipulated with a definite period with a limitation of five years at the most. The Communiqué also enables non-competition clauses to be set forth as valid for 1 year as of the expiry of the agreement. However, there are some Supreme Court precedents ruling that non-competition provisions in franchise agreements shall not continue after the termination of contractual relations.

Another important limitation stated in the Block Exemption Communiqué for Vertical Agreements is regarding the resale prices. Accordingly, preventing the purchaser from determining its own selling price would again result in the agreement being excluded from the scope of the block exemption (thus violating the Act on the Protection of Competition). Nevertheless, the principles of case law indicate that the franchisor shall be entitled to impose a maximum resale price or suggest a recommendation price to the seller, although the seller is contractually not obliged to comply with such recommendation.

Advantages of Franchising

Franchising has its own advantages both for the franchisee and franchisor. Above all, franchisor has the opportunity to expand its business in a shorter time, therefore its possibility to obtain credit from credit institutes increases. At the same time, franchisee has the opportunity to benefit from the possibilities of working with well-known brands and minimizes thereby risks and business issues. It may benefit from the personal, R&D works, know-how and advertising possibilities of the franchisor.

How to Start Franchising in Turkey?

Turkish franchising market provides various opportunities to the investors intending to give or acquire franchise in Turkey owing to its investment incentives, young population and developing economy. After the economic crisis on global scale, franchising became a more preferred investment in Turkey, than capital investments. Funding support of Banks has also provided franchisors to obtain loans more easily.

There are several stages of starting up a franchising. First of all the sector to be operated in shall be selected carefully by conducting market surveys, human resources studies etc. Another important point to be decided is the location of business. Currently Istanbul is Turkey’s business center and investment destination however there are many opportunities and government incentives to be enjoyed by investors in other cities.

Both parties should negotiate in good faith, order to obtain diligent information with regard to their company, business and targets before signing a franchise agreement. Parties should also create their business plans, financial and marketing forecasts, investment schemes and also inform each other in details on their aims and strategies beforehand.

Foreign investors should also consider the advantage that franchising will allow them to penetrate to the related market and reach to the target customer group in Turkey more effectively.

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