Understanding Franchise Agreements and Essential elements to be kept in mind before taking the plunge

A Franchise is a type of business where the Franchisor grants a temporary, and usually non-exclusive license to the Franchisee to sell its goods/services in a particular area using the Franchisor’s trade marks, logos, know-how and other intellectual property at a franchise fee and/or monthly/yearly royalty.

A Franchise Agreement is a legally binding contract, entered into between the Franchisor and the Franchisee, encompassing all the relevant terms and conditions for grant of the Franchise.

The Franchisor, who has already spent considerable time, effort and money in developing its business, is usually interested in granting a Franchise to increase its area of operation and market share. As far as the Franchisee is concerned, he gets a ready-made business which is already well established and popular. The Franchisee, thus, does not have to spend money and other resources on creating business plans, branding, product research and popularizing the product/business. The Franchisee also gets the benefit of the know-how of the business and training from the Franchisor.

Some examples of the products/services where franchises operate are fast food, fashion and clothes, courier services, fitness and nutrition, pathological laboratories, salons and florists. Some examples of successful franchises are Pizza Hut, Patanjali, Archies, Dr. Batra’s Clinic, Thyrocare, Lenskart, DTDC Courier, Jawed Habib, Subway, Pepperfry, Ferns N Petals.

A Franchise Agreement usually has the following clauses:

  1. Details of the Franchisor and Franchisee
  2. The amount of Franchise Fee and Royalty payable to the Franchisor. The Franchisor usually charges an upfront fee and an annual royalty. In addition he will charge for training , supply of know-how and technology, etc.
  3. Nature of the business that is being franchised.
  4. The Territory / Location where the Franchise will operate are clearly to be mentioned in the Franchise Agreement. If any exclusivity is being created, that too should be specified. Generally the Franchisor tries to fit in as many Franchise outlets in a given area. This only affects the Franchisee.
  5. Training and Ongoing Support is usually provided by the Franchisor at a cost to the Franchisee and its staff. The nature of training and support should be clearly specified to avoid any ambiguity. The capacity to replicate the business is extremely important if the Franchise is to be successful. The Franchisor has to ensure that the training that is provided is effective. It is important that the product sold at each of the franchise outlets is of the same standard and quality as the original.
  6. Supervision by the Franchisor. The Franchisor is entitled to supervise the activities of the Franchisee to ensure that quality is maintained and that whatever is stated in the Franchise Agreement and other manuals provided by the Franchisor to the Franchisee is being followed. Supervision is an extremely important facet for the success of a franchise.
  7. Term of the Franchise,  whether the Franchise Agreement can be renewed or not must also be specified. Usually there is a provision for a small percentage of increase in the royalty upon renewal.
  8. Advertisement and Promotion is done by the Franchisor and the Franchisee has to bear the cost.
  9. Use of Trade Mark and other IP of the Franchisor are specified. The Franchisor grants a limited and temporary license to the Franchisee to use the trademarks, logos, know-how of the Franchisor. The Franchisor may also specify the details of the signage that may be used by the Franchisee.
  10. Termination and Cancellation of the Franchise Agreement are provided for. The Franchise Agreement also usually has an Arbitration Clause in the event any disputes arise between the Franchisor and the Franchisee. Franchisor may also provide an exit route for the Franchisee to sell/assign his rights to another person or entity.

The Franchise Agreement will contain all these clauses in much more detail. Adequate care should be exercised while drafting the various clauses and understanding the effect of the same as this is usually intended to be a long term contract. Take legal help to understand this.

Also keep in mind the following points:

  • Check cost involved to set up and run the franchise. Consider the start-up costs, annual royalty fees, cost of the premises, staff salaries, taxes, cost of raw material, cost of decor, etc.
  • Clearly understand the nature of business and other intricacies of the same. Find out if there some kind of experience required for running the franchise business.
  • Have a clear picture of the kind of support the Franchisor will provide.
  • Check how other franchises are doing.
  • Keep in mind the number of hours of work and personal commitment that is required to be put in to run the franchise.
  • Keep in mind that just like there are several licenses that are required to be obtained before commencing any business, the same also applies to a franchise business.
  • Knowledge of the labour laws is also essential. In addition to complying with local regulations, sensitivities of persons residing in the building / area must also be kept in mind, as also bye-laws, rules and regulations of the building where the franchise is situate.
  • Check the financial status of the Franchisor.
  • The Franchisor also faces a risk if strict supervision and proper brand control is not maintained as it may result in brand dilution.

If you are confused or require any additional information you may visit our website www.rgajria.com for more information or contact us to talk to one of our experienced attorneys.

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