FRANCHISE AGREEMENT: A ROADMAP TO BUSINESS EXPANSION

WHAT IS FRANCHISING?

• Franchising is like a special partnership between two people. One person owns a business and grants a license of its brand name, ideas, and how it works with the other person. The first person is called the "franchisor," and the second person is the "franchisee." The franchisee pays money to the franchisor to use their business idea and name.
• The goal of franchising is to help both the business owner (franchisor) and the person starting a new business (franchisee). When you go to different places of the same franchise, like a Domino's Pizza, you expect the same taste and quality everywhere. Some other well-known franchises are KFC, McDonald's, Pizza Hut, and Subway.
• But here's an important thing to know: when you become a franchisee, you have to follow rules set by the franchisor for a certain amount of time, like a franchise Agreement.

WHAT IS A FRANCHISE AGREEMENT?

The foundation of a franchise is established through a franchise agreement, which is a legally binding contract between the franchisor and the franchisee. This agreement outlines the responsibilities and obligations of both parties. It encompasses the franchisor's requirements and expectations regarding how the business should be conducted. Essentially, it is an agreement where the franchisor grants the franchisee the right to use the company's name or system.

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ESSENTIAL ELEMENTS OF FRANCHISE AGREEMENT

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1. Details of both the Franchisor and Franchisee?– The franchise Agreement should include all the details and information of both the parties entering into the agreement.
2. Business operations - The franchise agreement should consist of information regarding the roles and responsibilities of the franchisee and how the franchisor expects the franchisee to run their business. The information should include details of the goods or services franchised, proper maintenance of accounts and other registers, standards of operations, and inspection of the said unit at regular intervals etc.
3. ?Monetary Details to Be Included- Franchise Fee - Every franchise has its own fee structure. These fees include the original franchise fee, regular franchise fees, royalty fees, and other fees. Late fees and interest are also included in the agreement. Any mandatory expenses should also be covered under the agreement. Royalty -?This is a fixed percentage that the franchisee has to pay to the franchisor on a monthly basis for the benefit to use his brand's name. Also, mention the specific format in which it needs to be paid, the mode of payment, details of the concerned bank account, and the intervals of making payment (monthly, quarterly or annual payment).
4. Location of the franchise’s operation - The Franchise agreement should clearly mention the location and the territory under which the said franchisee can conduct its business operation. This is an important step as the franchisor may franchise its business to several franchises in different locations.
5. Duration of franchisee - The agreement should include the duration for which the franchise is lent or licensed to the franchisee. Also, it is important to mention that the franchise agreement is subject to renewal or termination post this period.
6. Training support - The Franchisor provides training assistance to each Franchisee. It ensures that franchise businesses run smoothly and?to make sure that uniformity is maintained among all franchised businesses.
7. Intellectual Property Rights?– The franchise?agreement should include the way and the method in which the said franchisee can use the Copyright, Trademark, and Trade Secrets of the franchisor. It is important to note that this clause specifies the Intellectual Property Rights that the franchisee gets to use, manufacture, sell, and distribute the goods or services in franchisor’s name and can use the Copyrighted creation of the franchisor.
8. Renewal clause - Agreement must mention whether the franchisor wants to renew the agreement after the completion of the tenure of a franchise or terminate it. It should also state the terms and conditions for the renewal.
9. Termination Clauses - It includes the terms that mention detailed provisions related to the termination of the franchise agreement along with the grounds on which such a franchise may be declared canceled by the franchisor during the period of the agreement. It is done where either party fails to perform as per the terms mentioned in the agreement. It also clearly mentions penalties in cases where a franchise agreement is terminated.
10. Resale of?the franchise?– The?terms and conditions stated in the agreement?must also specify whether any rights regarding the reselling the franchise is given to the franchisee or not.
11. Non-Disclosure/ Confidentiality-?A franchisee is aware of various trade secrets during the franchise agreement, including proprietary formulas and recipes and how the franchisor conducts the business. This information should not be disclosed and kept private, the franchisor always states the confidentiality terms, deeds, and restraints in the franchise agreement.
12. Advertising- This clause of the agreement gives the responsibility to the franchisee to market, advertise and other activities for the promotion.
13. Long Term Duration - The franchise agreement will state the duration of the contract. Franchise agreements are long term agreements. An average term is 10 years and some are 20 years.
14. Non-Competes - Franchise agreements often contain restrictive covenants limiting what franchisees can do. For example, after the termination one cannot be permitted to operate a similar business during the agreement duration. Agreements also contain non-competes after termination. For example, a provision could prohibit from operating a competing business within 5 miles of former location for a period of three years after termination.
15. Arbitration - Franchise agreements generally contain an arbitration clause so that if in future any dispute arises then parties should go for arbitration. Instead of filing a lawsuit, parties might have to go before an arbitration body. The franchisor sometimes reserves the right to file a lawsuit to obtain an injunction under some conditions such as to stop the franchisee from disclosing confidential information about the franchise system. The agreement will contain the jurisdiction for filing any lawsuit. The choice of jurisdiction will be of franchisor.

TYPES OF FRANCHISE AGREEMENT IN INDIA

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1. Single Unit Franchise Agreement?– This type of agreement is the most common form of franchising. According to this agreement the franchisor gives the right and responsibilities to establish and operate one franchise to the franchisee. Also, the franchisees need to invest capital on their own and also apply their management skills for the growth of their business.
2. Multi-Unit Franchise Agreement?– In this type of agreement the franchisor gives the right and the responsibilities to establish and operate more than one franchised unit to the franchisee. Also, the multi-unit franchisee should have both the financial and decision making skills in order to expand multiple units itself.
3. Master Franchise Agreement?– In this type of agreement franchisor gives the right for a specific region, country, so, granting the master franchisee to offer a full range of products and services of the franchisor.

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DIFFERENT LAWS GOVERNING THE CONCEPT OF FRANCHISING

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1. In India, franchise agreements are controlled by various relevant laws enactments that are as follows:-

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• The Indian Contract Act, 1872?
• The Competition Act, 2002?
• The Income Tax Act, 1961?the Consumer Protection Act, 1986?
• The Arbitration and Conciliation, 1996?
• The Foreign Exchange Management Act, 1999
• The Copyright Act 1957,
• The Patent Act, 1970,
• The Trademarks Act, 1999,
• The Design Act, 2000?
• The Specific Relief Act of 1963,
• The Transfer of Property Act of 1882,?
• The Indian Stamp Act of 1899,
• The Information Technology Act of 2000

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BENEFITS OF A FRANCHISE AGREEMENT

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1. As franchise Agreements are valid legal documents, it binds the franchisor and the franchisee in a relationship where both have to comply with the specific provisions.
2. As both the franchisor and the franchisee get monetary and other benefits out of the relationship, there is little chance of dispute or breach of agreements.
3. The terms and conditions in the franchise agreement are mutually decided this results in a healthy business relationship between both of the parties.
4. ?A franchise agreement allows the franchisor to define guidelines for the maintenance of quality related to different sides of the trade before boarding the franchisee and binding them in a franchise contract.
5. ?The penalties for mismanagement or violation of the business branding are defined in the agreement to protect the brand name at all times.
6. ?Franchise Agreements must comply with the provision of the Indian Contract Act, 1872. Also, franchises may include the disclosure requirements as a part of the contract.

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ADVANTAGES OF FRANCHISOR'S

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• Franchising is a great way to expand a business without suffering additional costs on expansion.
• This also helps in building a brand name, increasing goodwill and reaching out to more customers.

ADVANTAGES OF FRANCHISEE’S

• A franchisee gets advantage to start a business on a ready-made brand name of the franchisor. As a result, the franchise can get more success and less risks of failure. Which is not guaranteed in case of starting up his own startup business.
• Franchisees will get to know business techniques and trade secrets of brands.

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CONCLUSION

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The franchise agreement is a legal document with rights and obligations which are binding on both the parties into contract. It provides investors (franchisees) with the product, brand name, recognition and a support system by the owner of the company (franchisor).There are terms and clauses that are essential to make the franchise agreement a strong document. It is important to explain all the terms and elements of a franchise agreement. If important details are not seen then it can affect the franchised business badly. That is why the advice of experienced professionals and legal experts is a necessity. Before signing, both the parties should review franchise agreements properly with the help of a lawyer.

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