The Brazilian political-economic scenario and the reflexes in the growth of the franchise market

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After facing the dragon of inflation, the Brazil that in 1983 reached the inflation rate of 83%, falling to 4.38% in 2000 after having fought against the flattening of salaries, finally regained it's economy and living conditions after the "Plano Real", presenting significant changes which reflexes were noticed by the franchise market.

In the period of 1998-2000, 13 million people left the poverty line, reducing the country's percentage of paupers from 43.8% to 32.7% - the numbers were reduced by 36% between 2003 and 2009 alone, yielding 27 million people with improved living conditions.

A research conducted in the six biggest cities of Brazil has shown that the population of paupers went in average from 42% in July of 1994 to 28% in January of 1996, the average income evolving from R$364.00 in 1992 to R$472.00 in 1999, reaching R$1,345.00 in 2011. In the same year, the average household's income was of R$2,341.00, with more than 69% of the population possessing mobile phones.

In the segment of franchises, there was a growth of 16.9% em 2011, with a revenue of R$879.8 billions, which represented in that year 2.3% of Brazil's GDP, considering a GDP growth of 3.5%. In 2012, Brazil became the world's sixth economy, with a GDP of US$2.469 trillions and, according to analysts, will be the fourth economic power, disputing the position with France, Italy and the United Kingdom.

According to the World Bank, Brazil, China, India, Indonesia and Russia will be the countries with the highest development rates in the next 25 years, being worth recalling that between 1947 and 1998, Brazil's GDP increased by a factor of 12.5, below Japan's growth alone, which GDP rose by a factor of 19.

Brazil corresponds to 42% of Latin America's GDP, with 330 companies being Brazilian, 80 Mexican, 60 Argentinian and 30 Chilean amongst the 500 biggest companies in the subcontinent.

In 2013, Brazil took the second position in the ranking of countries by number of franchisors, with 2,579 brand options - behind China alone - and the fifth position in the list that considers the amount of openings of retail stores, totalling 190,568 units. The result is fruit of an ascension started at 1994, when the Law number 8,955 regulated the system.

Since then, the number of Brazilian companies that pass along the management and process standards of their brands to franchisees is in full expansion and already accounts for more than 2% of the nation's GDP. In the State of "Rio Grande do Sul", the reality is not different and, currently, 45 local companies of varied segments possess the certification seal of the Brazilian Franchising Association.

The opening of a franchise means achieving the dream of having one's own business and the safety of the franchisees as, according to SEBRAE (Brazilian Service of Support to Micro and Small Companies) just 8% of business close before five years, against more than 80% of the micro and small companies out of the franchising system. On the other end of the deal, the system may represent a short-cut for the consolidation of the franchisor's expansion plans.

According to specialists, other relevant factors will have repercussion in the market in 2014: the presidential elections and the World Cup. Such factors, although not properly economic, have a great influence in the economy and the expansion of new businesses with franchises, as they imply the application of more governmental resources and, in the case of the World Cup, the creation of positive expectations amongst society.

Due to all the measures that have been taken in the last years, the availability of resources and the return of the confidence of the population in the investments on franchises - which continue in full expansion, we believe that the segment of franchises will have the chance of contributing towards a great leap in Brazil's GDP, as well as creating thousands of employment opportunities for the general populace, equally generating taxes for the State.

The legal tools that assure a solid franchise market

The Brazilian Franchise Law

Since the upcoming of Law number 8,955/94, known as the Franchising Law, created with the aim of increasing transparency between franchisors and future franchisee candidates, the legal background that guides the information given by the franchisor to the franchisee sprang, implanting the Franchise Offering Circular as an indispensable legal document, as is the Franchise Contract in the officialization of a commercial relationship within a Brazilian franchise system.

The 3rd Article of the Franchise Law establishes the extensive list of conditions to be observed by the franchisor when presenting the Franchise Offering Circular which has, according to the 4th Article of the same Law, to be handed to the candidate in a minimum of 10 days in advance of the signing of any Contract or Pre-Contract, or yet of the payment of any expenditures or taxes by the franchisee candidate.

The non-compliance of the rules stated in the 3rd and 4th Articles of the aforementioned Law, that is, if the Franchise Offering Circular is not presented or if it is not written in a clear and accessible language, and does not attend to the legal demands there enumerated, as well as if it is not presented within the 10 days in advance of the signing of any Contract or Pre-Contract, may render the Franchise Contract void by legal defect according to the 4th Article of the same Law, the Franchisor then having to return to the Franchisee the paid Franchise Tax and what was invested.

The Brazilian Franchise Law represents effective regulation of the sector, which gives confidence to the investor due to the fact that he now knows the rules of the game before the deal, which is from then on presented in a clear, transparent way.

Also applicable to the franchise business are the Tenancy Law, the Arbitration Law and the Brazilian Civil Code, this last one lauding the good faith in the business relationships between parts, from it's elaboration, throughout it's execution and until it's conclusion, transmitting the confidence and tranquillity necessary to those who intend to join the sector, due to the current propitious scenario of the Brazilian economy.

In short, the legal tools of franchising in Brazil collaborate towards the strengthening of this market, which becomes a viable and safe option for the national investor, as well as to the foreign, which may, still, choose to include in the franchise contracts an arbitration clause, determining that eventual controversies will be resolved by means of private arbitration, avoiding in such way the morose Judiciary, while maintaining the confidentiality in the arbitral procedures, the speed and the seriousness in the decisions, which may be applied by Arbitration Chambers with trustworthiness recognized in Brazil and abroad, being worth citing, for example, the Brazil-Canada Arbitration Chamber head-quartered in Sao Paulo, Brazil.

We conclude by highlighting that Brazil possesses the necessary legal tools for the franchise sector to run, establishing greater legal security for the operations, which truly encourages the growth of the sector and grants peace of mind to the investor, which, well-advised by a lawyer, will be able to en-root in the market and prevent eventual problems in the franchise business.

José Miranda de Siqueira
Associate of Miranda de Siqueira Advogados Associados - Brasília, Brazil
LL.M (Master of Laws) - Universidade Católica de Brasília
Doctoral student in Law with concluded disciplines - Universidad Nacional de Lomas de Zamora, Argentina
Thesis to be defended: "The Revocation of Franchise Contracts due to Malpractice of the Franchisor in Brazil and Argentina"
PhD student in Laws of Property - Università degli Studi di Messina - Italy
Phone: 055 (61) 3244 7342
E-mail: msc.ltda@terra.com.br
Skype: jose.miranda.df
Nextel: 8*412

Click here to advertise at Brazil market.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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