About
A franchise agreement is a legal agreement between the franchisor (an individual or company that sells or grants a franchise for the sale of goods or the operation of a service) and the franchisee (an individual or company that holds a franchise for the sale of goods or the operation of a service). The contract includes the expectations of the franchisor from the franchisee, states how the business must be operated, and other related provisions. In other words, the franchisee and franchisor’s rights and responsibilities are outlined in the agreement which acts as a license. In this agreement, the franchisor agrees to grant the systems, intellectual property, and brand or company name to the franchisee which can be an individual or an entity.
There are no such explicit franchising laws in India, but various statutory enactments are applicable as rules and regulations for franchising like Indian Contract Act, 1872, Consumer Protection Act, 1986, Trade Marks Act, 1999, Copyright Act, 1957, etc.
In today’s time with the rising popularity of franchising, the stakeholders need to understand the fundamentals, benefits, regulatory framework, provisions, and risks of franchise agreements, which in this article, is discussed.
Beforehand Obligation
FTC regulation states that before entering into an agreement, a franchisor is required to provide a Franchise Disclosure Document (FDD) to the franchisee. The Franchise Disclosure Document (FDD) is a document prepared by the franchisor to disclose all relevant information regarding the franchise to prospective franchisees. The FDD is a disclosure document, not a contract or a legally binding document. Also, the agreement is quite lengthy and comprehensive, potential franchisees must be given a proper time frame to evaluate it and get legal and other assistance well before they sign it.
Provisions of the Franchise Agreement
A franchise agreement acknowledges both the franchisor’s and franchisee’s goals, as well as what each party expects to gain from the agreement. There are several important provisions related to the franchise relationship, including franchise fees, royalties, store specifications, inventory requirements, training, and other elements important to the parties. They are briefly discussed below:-
Operating Location
The agreement must define the franchisee’s territorial limits, i.e the area the franchisee has the right to operate, and outlines its exclusive rights. The franchisee also must select a suitable place of operating the business as per the specification of the franchisor and obtain approval of the same.
Agreement’s duration
The time period of the franchisor-franchisee relationship is one of the most crucial components of the agreement. It can also be extended if the relationship between the parties is good and they both want to continue working together.
Operations
This agreement must detail how the business must run the operations which are to comply with the operating standards.
Royalties
This provision outlines the franchiser’s royalty structure, a fixed percentage on the sales that the franchisee must pay for the brand name’s usage, to be paid monthly. It further states that the franchisee cannot withhold any money owed to the franchisor based on the franchisor’s perceived nonperformance.
Initial and ongoing costs
Franchisees typically pay an ongoing cost to the franchisor initially and also for continuing to be a franchisee. Other, Several ancillary costs are frequently included in agreements that must be clear to both parties while entering into the agreement.
Intellectual Property Usage
Trademarks, logos, and manuals are also part of the agreement offered by the franchisor to the franchisee. The franchise agreement must state the expected use of trademarks, patents, and manuals by the franchisee.
Advantages of the Franchise agreement
Binding power
Since it’s a legally valid document, it binds all the parties binding and requires adherence to the provisions of the agreements.
Brand Power
The biggest benefit received by franchisees is the recognition of the franchisor’s brand name. If they start a business from scratch, they would have to build their brand and customer base from zero, which would take a significant time but this is not the case in franchise businesses.
Ease in doing business
One of the best advantages of franchising is that the franchisee receives business assistance with the brand, equipment, materials, and marketing strategy from the franchisor. In short, they provide everything one needs to start or run a business.
Failure Rate
It’s a fact that franchises have a relatively lower failure rate than other institutions because they become part of a brand name as well as have a system that will provide them with assistance and advice, reducing the likelihood of their going out of business.
More Profit
Franchises relatively make more money than other independently established businesses. Most franchises have well-known brands that draw in a good number of customers resulting in boosting profits.
Franchisor’s control
The agreement ensures that the franchisor, as the business owner, has better control over the business’s operations than the franchisee
Reduction of Legal Disputes
A well-drafted and lawyer-approved franchise agreement should reduce the likelihood of legal conflicts between the franchisor and franchisees, but they nonetheless exist. This avoids the complex and costly litigations in case of a dispute.
Read More: Producer Company Registration
Conclusion
The terms of the connection between a franchisee and a franchisor are established in a franchise agreement, which is a binding legal instrument. This gives franchisees access to the items, the business’s trademarked logo, and all of the franchise’s marketing know-how. It also ensures that both parties understand their obligations and rights and help safeguard the interests of both parties in the long run.
In recent years, the franchise industry has grown by leaps and bounds and is one of the fastest-growing industries in India today.
