Author: María Gracia Moreno Vegas

The “know how” is a term taken directly from the Anglo-Saxon conception of franchising, which serves as an umbrella to codify the set of knowledge, expertise, and tools that have been designed by the franchisor, are characteristics of the service or products offered by the franchisor, and differentiate it from other competitors.

This know-how, which normally involves a series of financial decisions, a maturation time for the practices and business model employed, and a capacity to invest in the research and development of the economic activity, will be one of the main elements in the establishment of a franchise.

In a franchise, the main exchange of value, or opportunity cost, between franchisor and franchisee is based on the transfer of know-how on the one hand, and the assumption of the financial risk involved in the business on the other. In the conception of a franchise, the successful transfer of know-how will be the guarantee, among other variables, of the economic performance of the franchise.

Likewise, the transmission of the franchisor’s know-how or knowledge is one of the basic conditions for the transfer of franchises provided for in article 2.1 b) of Royal Decree 201/2010, of 26 February, which regulates the exercise of commercial activity under the franchise system and the communication of data to the register of franchisors.

Examining this body of knowledge, it can be categorised as follows:

Production and distribution standards (Article 2.1. a), Royal Decree 201/2010):

This is about how and with what the product or service to be marketed is made, these are the basic “recipes” that distinguish the product, make it unique compared to the options offered by the market, but at the same time “standardise” it among all the franchises and main establishments, i.e. they make it equal to the rest of the products or services offered under the same brand.

It is not only the formal and material characteristics of the product or services offered that are transmitted from franchisor to franchisee, but also the way in which it is marketed to the public.

Stock and supply standards (Article 2.1. a), Royal Decree 201/2010):

These range from the formal characteristics (size and characteristics of the warehouse), quantity of product to be kept in stock, how the stock should be preserved, etc.) to the designation of which suppliers can be called upon to supply the business, as well as how payments are to be made and orders received from them.

Technical assistance and machinery used (Article 2.1 c), Royal Decree 201/2010):

In this case, the franchisor not only transmits to the franchisee the knowledge of what machinery is necessary for the manufacture or distribution of the products, but also the technical assistance for this, guaranteeing the continuation of the economic activity under similar conditions to the rest of the establishments (main or franchisees), but also obliges the latter to use them, without the franchisee being able (unless otherwise agreed) to use methods, machinery or technical assistance other than those used by the franchisor.

-Brand and distinctive signs, advertising and marketing: (Article 2.1. a), Royal Decree 201/2010):

These are some of the most essential elements of the constitution of a franchise and the transfer of the know-how inherent to it. It is the licence to use the trademark that has differentiated (and continues to differentiate) the franchisor in the development of its economic activity, and which irrevocably identifies the products or services offered with the franchisor.

By allowing the use of the franchisor’s trade mark and distinctive signs, the franchisee is able to identify himself with the franchisor’s expertise and public reception, without having to establish brand differentiation on his own and ensuring, at least in theory, the transfer of customers who already know and consume the franchisor’s goods and services.

The brand name, typology, corporate colours, product names and marketing campaigns are the identifying elements of the franchisor, which allow the franchisee to develop his economic activity without his clientele disassociating the products or services offered by the franchisee from the products and services of the franchisor.

Likewise, in the transfer of know-how from franchisor to franchisee, the latter is allowed (and required) to use the franchisor’s advertising campaigns and strategies, as well as the marketing models of the franchisor’s products and services.

In this way there is uniformity between them and only certain advertising and marketing practices can be associated with the brand, preventing and prohibiting competition between franchised and main franchised outlets in the use of advertising and marketing tools.

Organisation of work and resources, accounting and financial strategies (Article 2.1 b) Royal Decree 201/2010):

This includes action plans, organisational models and programmes used to harmonise the process of work organisation and location/allocation of resources, as well as policies and audit results.

Furthermore, this not only enables the smooth running of the franchisee’s business in a sense analogous to that of the franchisor and provides a sense of uniformity between outlets, but is also an essential part of the know-how transferred between franchisor and franchisee: it gives the franchisee access to a matured organisational model of the business, which has proven to be successful for the rest of the company’s outlets. 

Quality guarantees and standards (Article 2.1 b) and c), Royal Decree 201/2010):

When transferring knowledge, the franchisor not only provides the quality standards that its products and services must achieve, as well as the way to obtain them, but also requires the franchisor to comply with them, providing the necessary continuous technical and commercial assistance during the term of the franchise agreement.

If you would like to know more about franchise contracts and their elements, or if you would like us to study your case as a franchisee or franchisor, you can contact us and check the updates on our blog.