How to Start a Franchise Agreement

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An Overview of Franchise Agreement

An obligatory legal contract between the Franchisee and the Franchisor is officially known as the Franchise Agreement. The role of this agreement is to provide Franchisee with the power to use the system of franchisor and owner marks to regulate a franchised business. In laymen terms, it’s an agreement in which a well-recognised business (Franchisor) decides to provide its brand, operational brand and other essential support to another party known as Franchisee. The Franchisor permits the Franchisee to run the same business in exchange for a fee and share in the income generated. Franchise Agreement includes the legal terms & conditions and the professional that both the parties will share their revenue. This agreement aids in maintaining a pleasant bonding between the Franchisor and Franchisee. The Franchise Agreement includes the brand name, Franchise Agreement length, and fees, clauses that involved the penal provision, cancellation and compensation of the franchise. The Indian Franchising Industry is encountering tremendous growth and development/improvement.

What are the Different Types of Franchise Agreement?

  • Single-Unit Franchise Agreement

    This the most common and conventional form of franchising. This type of agreement issues some obligations and rights concerning the franchise establishment. It also tells the functions of the franchise. Though, franchisees are accountable to invest in their capital and use their managerial skills to expand their business.

  • Multi-Unit Franchise Agreement

    Franchisor has the authority to issue more than one franchised unit to the Franchisee, in simple terms; this agreement permits the establishment and operation of more than one franchise unit. However, it is vital for the multi-unit franchise to have enough financial capability, which works as a significant asset in the expansion of the business.

  • Master Agreement

    In this agreement franchisor allows the right for a particular nation, continent or area, so empowering the master franchisee to deliver a full range of products and services of the Franchisee. Further, the master franchisee also has the authority to employ other franchisees. This way becomes a franchisor to those franchisees who joins the system via its master franchise.

What Does a Franchise Agreement Consist?

It a legal document between the Franchisee and Franchisor and it is essential to go through the FDD (Franchise Disclosure Document) before signing the Franchise Agreement. Franchise Disclosure Document accurately mentions even the minute details of this agreement. It tells what one can anticipate from the settlement, mentions the name of the Franchisee and Franchisor, the sort of franchise that is being purchased, information regarding the previous execution of the Franchisor with the project, the promotional strategies, the region and the kind of assistance that a franchisee may require to grow the business.

Franchise Agreement is official proof of an extensive deal between two parties. It includes information such as commitments, highlighting the litigation’s expenses, income claims. Increase a good knowledge of the business's financial status to clearly acknowledge this document.

What are the Different Elements of a Franchise Agreement?

Following are some different elements of a Franchise Agreement:

Different Elements of a Franchise Agreement
  • Agreement Duration

    This clause describes the course of the relation between the Franchisee and Franchisor. At first, the franchise is asked to pay a starting fee to officially become a part of the connection, which is further followed by progressing fees to maintain their position.

  • A Layout of the Relationship

    This agreement covers the people’s name who is involved in the agreement, proprietorship of the Intellectual Property. The Franchise Agreement also describes about the franchise obligations to regulate their business as per the standards offered by the franchise.

  • Territory and Location

    This agreement also covers the territory and the location allocated to its franchise. Hence, the location assigned is different in each agreement. Franchise Agreement defines two types of territories:

    Exclusive Territory

    Only a single franchise is permitted in an exclusive territory zone. The Franchisor doesn't have the power to sell more than one franchise in a specific area. The territory allotted will remain special to that specific franchise only.

    Non-exclusive Territory

    In this territory, the Franchisor has the right to sell more than one franchise in a specific territory.

  • Advertising

    Franchisors tells the franchises about the efforts to be put in for brand advertising.

  • Training

    It mentions the training offered by the Franchisor, which consists of meetings, seminars, etc., that the Franchisor will question the Franchisee to attend.

  • Use of Intellectual Property

    Patents, Trademarks, and manuals are also the agreement part, which is provided by the Franchisor to the Franchisee. The Franchise Agreement also mentions the expected use of Trademarks, Manuals, and Patents.

Advantages of Franchise Agreement

  • Brand Control

    Once officially coming into an agreement, the franchiser will be able to mention the terms & conditions concerning the brand usage, penalty to be charged, and rules & regulations to be followed.

  • Business Right

    A franchise agreement provides you with the authority to access the trademarked business logo, products, and all types of marketing knowledge that a franchise can offer you. This agreement legally provides you with the consent to use a known trademarked business logo or name as a part of your business strategy.

  • Brand Recognition

    The name or brand recognition may be the best reason for buying into a franchise or entering into the franchise agreement.

  • Managerial Assistance

    When one is doing business with a respectable and reliable, and trustworthy franchise, it's in one's interests for that person will succeed.

  • Quality Control

    There is quality assurance for all kinds of goods dealt. Being a franchise ensures that one will rarely have to worry about the quality or consistency of products or services.

  • Higher Success Rates

    The success rate for franchise-owned businesses is considerably better than that of many other independent businesses.

  • Opportunity for Growth

    Many franchisees operate out in multiple locations. That kind of growth opportunity is hardly found with independent start-ups.

  • Operating Practices

    The processes are often spelled out in the franchise agreement. As it is already full-fledge working and set up.

  • Costs

    The franchise agreement explains all the costs involved in acquiring the franchise. It will explain the fees and royalties for which the franchise operator is responsible.

Important Points to Remember before Signing the Franchise Agreement

  • Service Provided by the Franchisor

    It covered vital promoting duties, training, and the products & services offered by the franchise to the consumers.

  • Domain Guidelines

    Particular region are assigned in which Franchisee can work together.

  • Agreement Renewal

    The prescribed time period of the agreement is described, and it also includes information regarding the renewal.

  • Transfer Rights

    Franchisors maintain whether the right is required to endorse the terms of any exchange and the transference. Similarly, franchisors determine that they have the advantage of the first refusal or to buy back a franchise.

  • Charges Payable to the Franchisor

    It contains franchise fee expenses, accumulated investment, and when the eminences are to be paid.

  • Promotion and Publicizing

    The Franchisor must deliver the appearance, content, and recurrence of publicising executed by the Franchisee.

Key Laws Ruling Franchising in India

  • The Indian Contract Act, 1872

    It states the law concerning the basic factors of the agreement between the Franchisee and the Franchisor. This Act finalises the principles like acceptance & offer, violation of contract, consideration, and different related activities.

  • The Competition Act, 2002

    Any arrangement concerning the distribution, production, acquisition, supply or control of goods that may occur to cause a severe effect on the competition within the nation is banned under this Act.

  • The Foreign Exchange Management Act, 1999

    If there is foreign assets and currency are consisted this Act comes into effect, international brands such as Nike, Adidas, Puma, regulates and manages their franchise in India with this Act. The Indian government is developing laws that will aid international brands in managing and opening their franchise in India.

  • Consumer Protection Act, 1996

    This Act is composed of keeping the customer's interest in mind. This Act has provided the customers' right to file a complaint against the Franchisee and the Franchisor. In case of any error either in the products/services, a customer can entertain the right to file a complaint against the unit. This Act safeguards the customers from unfair trade practices.

Frequently Asked Questions

The term “Franchise Agreement” denotes a legal document or a contract entered between a franchisor and franchisee.

The main purpose of a Franchise Agreement is to act as a legal document for the transaction where a well-established business decides to give its name, brand, operational model to another party.

The term “Franchisor” denotes a well-established business that decides to give its name, brand, operational model to another party.

The term “Franchise” denotes the person in favor of whom a well-established business decides to give its name, brand, and operational model.

The facts to consider are prior experience, outcomes of marketing programs, earning expectations, etc.

The term “Franchising” denotes the method of distributing products or services.

The main benefit of a Franchise Ownership or Model is that it provides easy access to an already established product.

The term “Master Franchise Agreement” means an agreement in which a franchisor grants the right for a particular country, region, or continent. Therefore, the main aim of a Master Franchise Agreement is to offer a full range of products and services of the franchisor.

The key laws are the Indian Contract Act 1872, Competition Act 2002, the Consumer Protection Act 1996, and Foreign Exchange Management Act 1999.

The things to consider before signing a franchise agreement are inspect about the franchisor, take proper advice from the experts, check financial statements, calculate the cost involved, previous litigations, etc.

FEMA 1999 comes into action whenever there is any involvement of Foreign Currency, or Foreign Assets. That means it helps the government in managing the franchisee of the foreign brands.

An individual can research and invest in a wide range of international and national franchise opportunities, such as Agencies, Distributorships, Dealerships, and Existing Franchises on Sale.

The different types of Franchise Agreement applicable in India are Single Unit Franchise Agreement, Multi-unit Franchise Agreement, and Master Franchise Agreement.

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