What is a Franchise?
A franchise is a business model where a franchisor grants a franchisee the right to operate a business using the franchisor's established brand name, trademark, systems, and processes. In return, the franchisee pays the franchisor fees, which may include an initial franchise fee and ongoing royalties. Franchising enables businesses to expand their market presence without directly managing all locations themselves.
Key Elements of a Franchise
Franchisor: The original owner of the brand, who provides the operational model, support, and branding.
Franchisee: The individual or entity that purchases the right to operate the business using the franchisor’s framework.
Franchise Agreement: A legally binding document outlining the terms and conditions of the partnership.
Royalty Payments: A percentage of sales revenue or a fixed fee that franchisees pay to the franchisor.
Training and Support: Franchisors often provide operational training, marketing support, and ongoing assistance.
Emerging Trends in Franchising in Nepal
Rapid Growth of International Brands: Brands like KFC, Pizza Hut, Subway, and Coffee Culture have entered the Nepalese market, indicating a rising demand for international franchises.
Expansion of Local Franchises: Local brands such as Bajeko Sekuwa, Bhetghat Restaurant, and Chicken Station are adopting the franchise model to expand across Nepal.
Sectoral Expansion: Franchising is no longer limited to food and beverages. It has expanded into education (Kumon, Montessori schools), retail (clothing, accessories), fitness (gyms like Gold’s Gym), and even cleaning services.
Digital and E-commerce Franchises: With the rise of digital businesses, franchises focusing on online services, courier delivery, and tech support are gaining traction.
Preference for Small-Scale Franchises: Due to limited capital availability, smaller franchises requiring lower investments are becoming popular among Nepali entrepreneurs.
Legal Compliance and Procedures for Franchising in Nepal
- Key Legal Framework:
Industrial Enterprises Act, 2020: Governs franchising as it relates to business operations and licensing in Nepal.
Company Act, 2006: Requires the franchisor and franchisee to register their businesses.
Foreign Investment and Technology Transfer Act (FITTA), 2019: Regulates foreign franchises entering Nepal by requiring approval from the Department of Industry.
Contract Act, 2000: Ensures the enforceability of franchise agreements.
Taxation Laws: Franchisees must comply with VAT, TDS, and income tax regulations.
- Steps to Start a Franchise in Nepal:
For Local Franchises:
- Business Registration:
Register as a sole proprietorship, partnership, or company with the Office of the Company Registrar.
Obtain a PAN/VAT number from the Inland Revenue Department.
Franchise Agreement: Draft a detailed franchise agreement covering royalties, territorial rights, operational guidelines, and dispute resolution mechanisms.
Permits and Licenses: Obtain specific licenses depending on the nature of the business, e.g., food licenses for restaurants.
Compliance with Labor Laws: Follow the Labor Act, 2017, for hiring and managing employees.
For International Franchises:
- Foreign Investment Approval: Seek approval from the Department of Industry under FITTA.
Minimum foreign investment threshold: NPR 50 million.
Approval of royalty payments and technical assistance agreements.
Brand Registration: Register the franchise's trademark in Nepal through the Department of Industries to protect intellectual property.
Tax Compliance:
Ensure compliance with VAT and corporate tax laws.
Royalty payments to international franchisors are subject to tax withholding.
- Approval from Nepal Rastra Bank (NRB): Required for remitting royalties and other payments to foreign franchisors.
Challenges in Franchising in Nepal
Regulatory Bottlenecks: Lengthy approval processes for foreign franchises.
Market Size: Limited purchasing power and market size can affect profitability.
Infrastructure Gaps: Underdeveloped logistics and supply chains.
Intellectual Property Issues: Weak enforcement of IP laws can deter foreign investors.
Conclusion
Franchising is becoming an attractive business model in Nepal, driven by a growing middle class, urbanization, and increasing awareness of global brands. However, it requires careful planning, adherence to local laws, and a strong franchise agreement to ensure success. With the right strategy and compliance measures, franchising can be a lucrative opportunity for both local and international players in Nepal.
