The mechanics of sale in franchising Silvia Bortolotti (Verona, April 17, 2009)

The normal solution: The franchisee buys and resells the products in the franchise unit The franchisee bears the financial and commercial risk Equipping the shop with sufficient quantities and ranges of products Payments Possible returns

Consignment sales (or similar solutions) The products stocked in the shop remain the franchisor's property until they are sold to the final customers Following the sale to the customer, the franchisor issues the relevant invoice The franchisee pays the products’ price, its commission or margin being deducted After one year from delivery, the products not returned become the franchisee’s property

Advantages for the parties: The franchisor may avoid to continuously supply the franchisee with the products The franchisee has the availability of the full range of products to be sold within the unit The franchisor can freely decide which products to place within the franchising shop The franchisee may return the products to the franchisor (to the extent admitted by the parties in the contract) Can the price be imposed to the franchisee?

Tax aspects No invoice when the goods are delivered to the franchisee The waybill/bill of lading must specify that the products are delivered within the framework of a consignment sales contract (i.e. no immediate transfer of property) Within the end of the month following the sale to the customer, the franchisor must issue the relevant invoice In case of return of products, the franchisor does not have to perform any tax obligation

Possible risks Risk that the franchise agreement may be qualified as commercial agency contract: normally there shouldn’t be that risk, but in some countries (e.g. Japan) such risk seems to exist

Conclusion In case a consignment sales system is chosen, it is advisable to carefully verify the compliance of such system with the contractual and tax provisions of the law applicable to the franchising contract. Thank you!