Overview of Franchise Agreement
A legal, binding contract between the Franchisor and Franchisee is legally known as Franchise agreement. The function of a franchise agreement is to give franchisee an authority to use the franchisor’s system and proprietary marks to manage a franchised business. In laymen term, it is an agreement in which a well-established business (franchisor) decides to give its brand, operational model and other required support to another party called franchisee. Franchisor allows the franchisee to run a similar business in exchange for a fee and share in the income generated. This agreement contains the professional and legal terms and conditions that both the parties will share in their tenure. Franchise agreement helps in maintaining a cordial relationship between the franchisee and franchisor. The agreement contains the name of the brand, the length of franchise agreement, and amount of fees, clauses that deals with penal provision, compensation and cancellation of the franchise. The Indian franchising industry is experiencing vigorous growth and development.
What Does Franchise Agreement Include?
A legal document between the franchisor and franchisee which defines the roles and responsibilities of both the parties is known as Franchise Agreement. It is necessary to go through Franchise Disclosure Document (FDD) before signing the franchise agreement. FDD precisely mentions even the minute details of the agreement. It narrates what one can expect from the settlement, mentions franchisor and franchisee’s name, the sort of franchise that is being purchased, information in relation to past execution of the franchisor with the project, the region, promotional strategies and the kind of help that a franchisee may need to grow the business.
Franchise Agreement is a legal proof of broad deal between two parties. It contains information like franchisee’s commitments, litigation’s underlying expenses, income claims. Gain a good knowledge on the financial status of the business to clearly understand this document.
Elements of a Franchise Agreement
- An Outline of the relationship
A Franchise agreement covers the name of the people who are involved in the agreement, ownership of the intellectual property. The agreement also talks about the obligations of the franchisee to manage their business as per the standards provided by the franchisor.
- Duration of the Agreement
This clause tells about the course of the franchisor-franchisee relationship. Initially, franchisee is asked to pay an initial fee to legally become a part of the relationship which is further followed by continuing fees to maintain their position.
- Location and Territory
The Franchise Agreement also covers the location and territory allocated to its franchise. Though, the location allocated is different in each agreement. Franchise agreement defines two types of territories:
1. Exclusive Territory
2. Non-exclusive Territory
Exclusive Territory
Only one franchise is allowed in an exclusive territory zone. The franchisor does not have the right to sell more than one franchise in that particular area. The territory assigned will remain exclusive to that particular franchise only.
Non-exclusive Territory
In a non-exclusive territory, the franchisor has the right to sell more than one franchise in that particular territory.
- Use of Intellectual Property
Trademarks, patents, and manuals are also the part of agreement, which is offered by the franchisor to the franchisee. The agreement also states the expected use of trademarks, patents, and manuals.
- Advertising
Franchisors narrate the franchisees on the efforts to be put in for advertising the brand.
- Insurance
All franchise agreements need the franchise to obtain insurance so that they can cover the functions of their business.
- Training
This section of the agreement mentions training provided by the franchisor which includes seminars, meetings, etc that the franchisor will ask the franchisee to attend.
Benefits of Franchise Agreement
- Business Privilege
A franchise agreement gives you the power to access to the trademarked business logo, the products and all kinds of marketing expertise that a franchise can provide you. Franchise agreement legally gives you the permission to use a known trademarked business name and logo as part of business plan.
- Control of the Brand
Once legally coming into an agreement the franchiser shall be able to states the terms and conditions regarding the usage of the brand, penalty to be imposed and rules and regulations to be followed.
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Types of Franchise Agreement
- Single Unit Franchise Agreement
This is the traditional and most common form franchising. This kind of agreement issues the rights and obligations regarding the establishment of the franchise. It also narrates the operations of the franchise. Though, franchisees are responsible to invest in their own capital and use their managerial skills to grow their business.
- Multi-Unit Franchise Agreement
Franchisor has the right to issue more than one franchised unit to the franchisee, in other words, this agreement allows the operation and establishment of more than one franchise unit. But it is essential for the multi-unit franchise to have smart financial capability which works as an important asset in the growth of the business.
- Master Franchise Agreement
In this type of agreement franchisor grants the right for a specific country, region or continent, hence empowering the master franchisee to provide a full range of products and services of the franchisor. Moreover, the master franchisee also has the right to recruit other franchisees. This way the master franchisee becomes a franchisor to those franchisees who joins the system through its master franchise.
Points to Check before Signing the Franchise Agreement
- Domain Guidelines
Specific regions are allocated in which franchisee can work jointly.
- Charges Payable to the Franchisor
This includes accumulated investment, franchise fee expenses, and when the eminences are to be paid.
- Service Offered by the Franchisor
It covers required training, promoting duties, and the products and services provided by the franchise to the customers.
- Renewal of Agreement
The specific time period of the agreement is mentioned and it also contains information related to the renewal.
- Publicizing and Promotions
The franchisor should provide the content, appearance, and recurrence of publicizing implemented by the franchisee.
- Transfer Rights
Franchisors commonly maintain whatever authority is needed to endorse the terms of any exchange and the transference. Likewise, franchisors determine that they have the privilege of first refusal or to purchase back a franchise.
Key Laws Governing Franchising in India
- The Indian Contract Act, 1872
This act defines the law regarding the fundamental aspects of the agreement between the franchisor and the franchisee. The Indian Contract Act finalizes the principles such as offer and acceptance, consideration, breach of contract and various related activities.
- The Competition Act,2002
Any arrangement in regards to production, distribution, acquisition, supply or control of goods that may happen to cause an adverse effect on the competition within the country is prohibited under this Act.
- Consumer Protection Act, 1996
This Act is formulated keeping the interest of consumer’s in mind. This act has given the right to consumers to file a complaint against the franchisee and the franchisor. In case of any flaw either in the product or service a consumer can entertain the right to file a complaint against the unit. Consumer Protection Act protects consumers from unfair trade practices.
- The Foreign Exchange Management Act, 1999
When there is foreign currency and foreign assets are include this act comes into action. International brands like Reebok, KFC, Nike, controls and manages their franchise in India with this Act. The Indian government is improvising the laws which will help the international brands in opening and managing their franchise in India.
Frequently Asked Questions
A legal, binding contract between the Franchisor and Franchisee is legally known as Franchise agreement. . In laymen term, it is an agreement in which a well-established business (franchisor) decides to give its brand, operational model and other required support to another party called franchisee.
In laymen term, it is an agreement in which a well-established business (franchisor) decides to give its brand, operational model and other required support to another party called franchisee.
Don’t think too much about the answer; just explore the possibilities of these questions:
Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
There are a number of aspects to the franchising method that appeal to prospective business owners. For example, easy access to an established product and a proven method of operating a business reduces the many risks of opening a business. In fact, U.S. Small Business Administration and U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups. The franchisee purchases not only a trademark, but also the experience and expertise of the franchiser's organization. However, a franchise does not ensure easy success. If you are not prepared for the total commitment of time, energy and financial resources that any business requires, you should stop and reconsider your decision to enter the franchise business.
In this type of agreement franchisor grants the right for a specific country, region or continent, hence empowering the master franchisee to provide a full range of products and services of the franchisor. Moreover, the master franchisee also has the right to recruit other franchisees. This way the master franchisee becomes a franchisor to those franchisees who joins the system through its master franchise.
This Act is formulated keeping the interest of consumer’s in mind. This act has given the right to consumers to file a complaint against the franchisee and the franchisor. In case of any flaw either in the product or service a consumer can entertain the right to file a complaint against the unit. Consumer Protection Act protects consumers from unfair trade practices.
When there is foreign currency and foreign assets are include this act comes into action. International brands like Reebok, KFC, Nike, controls and manages their franchise in India with this Act. The Indian government is improvising the laws which will help the international brands in opening and managing their franchise in India.
You could research and invest in a wide variety of national and international franchise opportunities, agencies, dealerships, distributorships and existing franchises on sale.
