Brazil’s franchise sector has established itself as a mature and resilient business model, demonstrating remarkable adaptability even during challenging economic periods. The introduction of Federal Law 13.966 in December 2019 marked a significant transformation in how franchise and franchisor Brazil relationships are structured and regulated.
The Brazilian Franchising Association data reveals the sector’s robustness, particularly during the pandemic when 89% of member units successfully transitioned from physical to digital operations. Many franchising networks implemented strategic measures, including temporary suspension of royalties and marketing fund contributions, while simultaneously developing new products and marketing channels.
The Evolution of Brazil’s Franchise Legislation
The 2019 legislation replaced the outdated 1994 framework, which no longer aligned with contemporary market dynamics. This modernization addressed critical gaps and strengthened the foundation of trust essential for successful franchise and franchisor Brazil partnerships.
The primary objective centers on ensuring potential franchisees receive comprehensive information before signing agreements or making financial commitments. This protection mechanism operates through a crucial document known as the Circular de Oferta de Franquia (Franchise Offering Circular), commonly referred to as COF.
Key Principles of the New Legal Framework
The updated legislation emphasizes several fundamental principles that govern franchise and franchisor Brazil relationships:
Economic Independence: Article 1 explicitly confirms the autonomous nature of both contracting parties. The legislation reinforces that franchisees and franchisors operate as independent entrepreneurs, eliminating previous ambiguities. During training periods, franchisees maintain exclusive liability for their employees, clarifying employment relationships.
Dispute Resolution Options: Article 7, expressly permits arbitration as a dispute resolution mechanism. Previously, debates existed regarding whether franchise agreements constituted adhesion contracts, potentially restricting arbitration options. The legislation now allows parties to select arbitration, provided the clause appears prominently in attached documents or bold text, accompanied by the franchisee’s signature or acknowledgment.
Enhanced Transparency Through the COF
The Franchise Offering Circular represents the cornerstone of franchise and franchisor Brazil transparency requirements. Without this document, legitimate franchise operations cannot exist. The COF provides prospective franchisees with essential legal, commercial, and financial information, enabling informed risk assessment and opportunity evaluation.
The 2019 legislation expanded Article 2 from 15 to 23 required items, significantly broadening disclosure obligations:
Comprehensive Franchisee Network Information
Franchisors must now provide a complete roster of all franchisees who joined or currently participate in the network over the preceding 24 months, including names, addresses, and telephone numbers. The previous requirement covered only 12 months. This extended timeframe enables prospective franchisees to verify whether stated COF provisions reflect actual operational practices.
Territorial Operation Policies
The COF must detail territorial action policies, including rules governing company-owned and franchised units, alongside penalties for non-compliance. This transparency helps potential franchisees understand competitive boundaries within the franchise and franchisor Brazil network.
Intellectual Property Status
Disclosure requirements regarding franchised brands and intellectual property rights became more comprehensive. While previous legislation mandated only trademark and patent information registered with the National Institute of Industrial Property, current requirements encompass all intellectual property rights owned by the franchisor, with complete descriptions filed with appropriate authorities.
Critical New COF Requirements
Although many franchisors had voluntarily adopted certain practices, the legislation formalized several essential disclosure elements:
Transfer and Succession Rules
Franchise agreements typically involve personal, non-transferable relationships with operating partners, who undergo franchisor-approved selection and training processes. When franchisees seek to transfer units or initiate succession planning, explicit franchisor authorization generally becomes necessary. The legislation now requires franchisors to present clear transfer and succession rules within the COF, ensuring transparency before franchisees join the network.
Penalty and Indemnity Specifications
The franchise and franchisor Brazil relationship involves complex details and particularities. Unlike flexible business models, franchising restricts franchisee innovations. The legislation mandates detailed disclosure of circumstances triggering penalties, fines, or indemnities, including specific amounts. This requirement ensures franchisees understand non-compliance consequences before contractual commitment.
Advisory Council and Association Disclosure
Upon joining franchise systems, franchisees become network participants. Franchisee advisory councils or associations provide platforms for discussing promotional campaigns, influencer hiring, customer benefits, and new product or service introductions. The legislation requires franchisors to specify which system their business adopts and make relevant documents available to prospective franchisees.
Additional Operational Requirements
The COF must now disclose whether franchisors establish minimum purchase quotas, product or service refusal possibilities, rules limiting competition between franchisees or company-owned units with associated penalties, and contractual term specifications with renewal conditions.
Property Sublease Provisions
Article 3 introduces provisions allowing franchisors interested in maintaining specific business locations to sublease properties to franchisees. Notably, franchisors may charge amounts exceeding their payments to property owners, provided such arrangements do not impose excessive burdens on franchisees. Valid subleases require express, clear documentation in both the COF and franchise agreement.
International Franchise Agreements
Article 7 clarifies requirements for international franchise and franchisor Brazil arrangements. Considering the substantial presence of foreign brands—205 brands from 30 countries in 2020 according to Brazilian Franchising Association data, with beauty and fashion sectors particularly prominent—these provisions address significant market needs.
International agreements must be written in Portuguese or include Portuguese translations, with translation costs borne by franchisors. Parties may select jurisdiction from either domicile country, but must maintain legal representatives or attorneys in the chosen jurisdiction with authority for administrative and judicial representation.
Legal Analysis Period
The legislation mandates that franchisors provide the COF at least 10 days before contract signing. This waiting period allows prospective franchisees to conduct thorough analyses of business terms, costs, fees, support offerings, party obligations, and potential legal matters involving the franchise.
Failure to provide the COF correctly or omission of material information enables franchisees to challenge contract validity and potentially seek indemnification for resulting damages.
Strategic Advantages for Prospective Franchisees
The enhanced disclosure requirements empower potential franchisees to conduct comprehensive due diligence:
Former Franchisee Contacts: The 24-month roster provides access to individuals who can offer authentic insights regarding experiences, support quality, and profitability. These conversations represent invaluable information sources during decision-making processes.
Financial Health Assessment: Two-year financial statements enable evaluation of franchisor stability. Franchisor financial health directly impacts individual franchise success.
Litigation History: Required disclosure of legal actions, particularly those initiated by other franchisees, serves as an important warning indicator. Extensive litigation history may signal problematic franchisor-franchisee relationships.
Conclusion
While the legislation comprises only ten articles and does not exhaustively address all sector aspects, the changes represent significant positive progress. Some scholars consider franchising an atypical business due to its complexity and multiple interwoven legal relationships.
The framework provides enhanced security for both parties, particularly regarding sensitive matters such as employment relationship exclusion. By requiring comprehensive COF information, the legislation enables prospective franchisees to make informed decisions about business advantages and disadvantages, system compatibility with their profiles, and commitment to following prescribed business formats.
Transparency defines this new legal landmark for franchise and franchisor Brazil operations. This transparency attracts additional investors and entrepreneurs to the business model, stimulating national economic growth through job creation, income generation, and substantial GDP contributions. The legislation essentially installed a modern signaling system designed to make investment journeys safer and more predictable for both franchisors and franchisees.
Start your entrepreneurial success with MBE
MBE is expanding around the globe. Click below to get more information about our opportunities.
References: