All You Need to Know about Franchise Business Agreement

A franchise is a business model where one company (Franchisor) grants an individual or another company (Franchise) the rights to operate a business under their brand name for a limited time period while the franchisee is bound to pay an initial price and ongoing royalty in the basis of the sales and service. This is an agreement-based process where the franchisee can use the logo, business process, goods, and services of the franchisor. In simple terms, a contractual agreement that binds the franchisor and franchisee to do business under the same name but different proprietor is known as franchise business agreement.

What Is Franchising?

The franchise is a legal agreement/contract under which the franchisor allows the franchise rights to sell, distribute, provide service, or use the franchisor’s intellectual properties in exchange for royalty fees and deposit fees, rent, etc. Here we have noted down the key elements and terms of franchising.

Some Used Terms of Franchising:

• Franchisor: The Franchisor is the company that owns the brand and grants the rights.
• Franchisee: Franchise is the company that buys the rights and operates under the brand.
• Franchise Fee:  An initial payment paid by the franchisee to the franchisor as per the agreement.  
• Royalty: This is a method of payment to the franchisor for the rights to ongoing use of the product/service, etc. as per agreement.
• Franchise Grant: This explains the relationship between franchisor and franchisee and specifies the rights and responsibilities of both. 
• Operational Manual: This section contains guidelines, training, quality standards, and other business operations.
• FDD: FDD or Franchise Disclosure Document is a document that includes information about the franchisor and the franchise system.
• Renewal and Transfer: This section states the terms and conditions for renewal and transfer.
• Intellectual Property: Intellectual property term is used to represent the franchisor’s trademark, logos, and other business-related information.
• Termination: This section outlines the terms and conditions under which a franchisor can terminate the agreement.

Governing Laws:

The Finance Act 1999 introduced by the parliament of India states a clear definition of the franchise agreement in India. According to the Act, Franchise agreement is an agreement by which the franchisee is granted the rights to sell or manufacture goods, provide services, and run any process of the franchisor. Here we have mentioned key legal Acts that regulate franchising in India.

• The Indian Contract Act, of 1872: Franchise agreements are legally bound by the Indian Contract Act, of 1872. This ensures the aspects like offer, consideration, and exit strategy.
• The Trademark Act, 1957: The franchising business involves the trademark, logo, brand name, and other intellectual properties of the franchisor. This law protects the franchisor and prevents the franchisee from using the franchisor’s trademark.
• The Copyright Act, 1957, and The Patent Act 1970: This Act protects the franchisor’s copyright and patent works. 
• The Competition Act, 2002: This Act ensures fair business practices. It prohibits any anti-competitive functions that can affect the franchise market.  
• The Consumer Protection Act, 2019: This Act holds the franchisor and the franchise both accountable for any unfair trade practices and flaws in goods and services.
• The Foreign Exchange Management Act, 1999: This Act is effective when any foreign franchisor is involved in offering franchise. This Act undertakes the funds transfer or any other financial transactions from any international franchising. In this particular case, the franchisees need to grant permission from the Reserve Bank of India before involving in any kind of transaction.
• The Arbitration and Conciliation Act, 1996: This Act allows to solving of any disputed matter that occurs through Arbitration instead of judiciary court.
• The Income Tax Act, 1961: This Act Governs the taxation from any income generated through franchise business agreement.

How Does Franchising Work?

Franchising is one of the most popular marketing strategies to expand businesses and cater to a new market. This model allows the franchisee to operate under a recognized brand name, and proven strategies, and mitigate risks associated with starting a new business from scratch. On the other hand, the franchisor can make a profit expand their brand reach, and attract new customers without any headache of acquiring premises, managing workers, and other management. A franchisee can open a new branch under the same franchisor after completing all the legal formalities. This is like the legal process of a joint venture between two parties, one who wants to expand their business and another who wants to benefit from the reputed brand name. A franchisee must follow the franchisor's rules and regulations to maintain consistency and reputation. It can limit the freedom and creativity of the franchisee but it is a profitable option for those who want to take minimum risk to make a profit. The legal agreement highlights financial obligation, the duration, training and support, marketing, laws and provisions, and exit strategy. Here we have noted down some of the key points of the franchise business agreement.

• The franchisor provides managing instruction, assistance, and rights to use their intellectual properties to the franchisee.
• The franchisee must pay an initial fee and royalty every month/year as per the agreement.
• The franchisee must maintain the pricing, quality and guideline mandate by the franchisor.
• The agreement stays valid for a limited time period as per the negotiation of both parties.
• The agreement includes terms for renewal, termination, and transfer.
• Both the franchisor and franchisee are liable under the agreement, and they will face legal charges if the code of conduct breaches. 

How to Form a Franchise Business Agreement?

Forming a franchise agreement is a complex process. Here are the following steps to create a franchise agreement.

1. Define the Franchise and Franchisor: Mention the legal name, address, and other business-related details of the franchisee and the franchisor.
2. Grant of Franchise: Mention the rights provided to the franchisee including brand name, Trademarks, operational support, etc.
3. Franchise Fee and Royalties: State the initial fee, ongoing royalty payments, and marketing fund contribution.    
4. Franchise Territory: Mention the location and any territorial restrictions (If there are any).
5. Time Duration: State the time duration of the agreement.
6. Training and support: Mention the training program provided by the franchisor. Outline the factors of marketing, operational support, supply chain management, and technical assistance.
7. Quality standards: state a clear policy on branding, customer support, and product quality.
8. Intellectual Property Protection: Set terms on using brand name, logo, trademark, etc. prohibit the franchisee from using the brand outside the agreed terms.
9. Sales and Financial Report: Specify the submission time of the sales and financial records.
10. Non-compete and confidentiality: Restrict the franchisee from starting a competing business and mention a confidentiality clause to protect trade information.
11. Termination and exit terms: Define the conditions which under the franchisor can terminate the contract. Include the franchisee’s exit strategy.
12. Dispute Resolving: mention the dispute-resolving methods such as arbitration, mediation, or legal courts.
13. Legal facts and Signing: make sure that the agreement follows contract laws, intellectual property laws, and competition laws. Then review the agreement with a franchise lawyer. And in the end, both parties must sign the franchise business agreement.
14. Assignment: Any assignment effort will be invalid without previous written permission of the franchisor.

How to Draft Franchise Agreement:

We have provided a sample of franchise business agreement.

Here is a general overview of how to draft a franchise agreement.

This Franchise Agreement entered into on the...............................day of......................., 20..............

BY AND BETWEEN:

....................................................Limited a Company incorporated under the Companies Act, 1956/2013, having its Registered Office at..........................., represented herein by its................................. M/s.................................................. (hereinafter referred to as the ''Franchisor'', which expression shall, whenever the context so requires or admits mean and include its successors and assigns) of THE ONE PART;

AND

M/s.................................................. a Partnership Firm/company incorporated under the laws of India,  having its place of Business at.............................. represented herein by its Partner Shri............................. (hereinafter referred to as the ''Franchise'', which expression shall, Shall, unless repugnant to the meaning or context hereof, their heirs, legal representatives, executors, and permitted assigns) of THE OTHER PART;

Points to Check before Signing the Franchise Agreement

Here are some important checkpoint to note down:

1. Designated Work Areas: The franchise is assigned a specific area where they can operate separately.
2. Fees Paid to Franchisor: Total payments such as initial fee, royalties, and capital investment.
3. Franchisor’s Services: Training, marketing responsibilities, and the goods and services provided by the franchise.
4. Agreement Renewal:  state the time duration of the agreement with agreement renewal-related information.

Types of Franchise Agreements:

A franchise business agreement is a legal path to bridge working relations between a franchisor and a franchisee. The type of agreement depends on a few important factors. Here are some most used franchise agreements discussed below.

1. Single Unit Franchise:

Single-unit franchise or (Direct Unit Franchise) is the most common form of franchising. Here are some facts mentioned below.

• The franchise is allowed to run one unit.
• This is the most preferable format for first-time Franchise.
• The franchisee is responsible for investing its own capital and operating its own management. Here are some examples: Any local ‘Wow Momo’ or ‘Domino’s’ single unit owned by a businessman.

2. Multi-unit Franchisee:

When the franchisor grants any business to open more than one franchise unit in a specific number of locations. Here are some facts about multi-unit franchises.

• This franchise is permitted to open and operate multiple outlets in a specified territory.
• The franchise can expand units without individual agreement.
• The franchise must have the financial capability to operate and develop multiple units by themselves. Here are some examples: Where the owner runs more than one unit of ‘Wow Momo’ or ‘Domino’s’ running in a specific territory.

3. Master Franchise:

A master franchise is a type of franchise where the franchisor allows a business to provide services, and sell a full range of products of them through sub-franchising for a country, region, or any larger territory. Some of the important facts about the Master franchise are mentioned below.

• The master franchise has the right to recruit another franchisee.
• The master franchise has the rights and obligation to open and operate multiple units in a designated territory.
• The master franchise operates like an acting franchisor for the sub-franchise who joins through the master franchise. A prominent example of the master franchise is Hardcastle Restaurants Pvt. Ltd. This is a master franchise of McDonalds operating in the southern and western regions of India.

4. Area Development Franchise Agreement:

This type of franchise agreement permits to opening and operation of franchises in a particular territory in a specific timeframe. As an example ‘Swiggy’ allows entrepreneurs to open multiple units of ‘Swiggy Instamart stores across any city. The Area Development Franchise owners are responsible for recruiting and managing the operation of the units under their supervision.   

5. Business Format Franchise Agreement:

This is another common type of agreement where the franchise adapts the entire business system, such as branding, operation, marketing, training, trademarks, etc. This kind of franchise is mostly used in fast food chains, retail, service industries, etc.

6. Joint Venture Franchise Agreement:

This kind of franchise agreement allows two or more two businesses to set up a joint venture to establish a franchise module.

• This kind of agreement is mostly used between local businesses and international franchisors.
• The franchise and the franchisor share ownership, liabilities, profits, etc. Here are some known examples: Tata Group and Starbucks, Maruti and Suzuki, etc.

7. Conversion Franchise Agreement:

Conversion franchise agreement grants businesses to convert their existing operation into a franchise of any franchisor’s brand. Most of the time small independent businesses join a well-known brand. Help the existing business to revive and enhance itself from the franchisor's brand, recognition, marketing, etc. Here are some examples: Most hotel chains prefer to use this kind of agreement to grow their network. Local hotels convert themselves to big hotel chains like ‘OYO’, ‘Marriot’, etc. They acquire local hotels under their franchise to expand their business.

Sample Clauses from Franchise Agreement:

Through this section, we have discussed some of the key- clauses that are included in a franchise business agreement.

• Franchise Fees: A franchise fee is a one-time payment, paid by the franchisee in exchange for the rights to use the franchisor's brand name, trademark, and other intellectual properties. On the other hand, this expands the franchisor’s market reach, directly affecting their revenue. The amount should be clearly mentioned in the franchise agreement. The franchise fee depends on the marketability of the franchise. To avoid future disputes between the franchisor and franchisee, add clauses regarding refundable fees or non-refundable fees.
• Territorial Rights: This clause provides protection against competition from another franchisee of the same franchisor. This allows the franchisee to operate in a particular territory without any internal competition. The franchisor and the franchisee can choose the area through negotiation.
• Intellectual Property: Intellectual properties including, copyrights, trademarks, and patents are protected by this clause to stop misuse by others. Adding this clause in the agreement will ensure proper use of the intellectual properties by the franchisee while protecting their interest. The logo, advertisement, or any content of the franchisors and any granted patents by the franchisor are protected under this clause.
• Termination Conditions and Dispute Resolution: Add terms and conditions of how to terminate the agreement. These conditions will ensure both franchisee and franchisor will be accountable to one another. Resolving a dispute is a complicated matter in any kind of situation. To prevent this add clause mentioning the dispute-resolving methods such as arbitration, mediation, or legal courts.
• Recital: A recital is a statement of facts that always starts with the word ‘whereas’. This section discusses all the business details between the parties and the intention of the agreement briefly.
• Confidentiality: The confidentiality clause obliged the franchisor and the franchisee not to disclose any important information to anyone outside without informing one another. Franchise-related information such as trade secrets, operation manuals, marketing strategies, technological information, financial information, etc. is protected by this clause. Mention the legal implications if any party violates the rules

Advantages of a Franchise agreements:

Franchise agreements provide various advantages for the franchisor and the franchise both. Here are the key advantages:

1. For the Franchisor:

• Business Expansion: franchisor expands their business into new markets without any legal and financial headaches.
• Fix Revenue Generate: Franchisor has a fixed place to generate revenue from the initial fee, rent, royalties, etc.
• Local Market Knowledge: A local franchise can relate to the local market and consumer preference which leads to a better performance.  
• Reduce Management Pressure: The franchise operates and manages its daily business providing time for the franchisor to focus on the brand growth.

2. For the franchisee:

• Risk Mitigation: Franchises operate under a well-known brand that reduces the risk-taking factor of starting a business from scratch.
• Training and Support: Franchises received training for product knowledge, operational systems, marketing, etc. Ongoing support from the franchisor helps the process to operate smoothly.
• Proven Business Model: Franchises acquire a proven business model that eliminates the stress of the trial phase.  
• Faster ROI: Franchises undertake established and reputed businesses that directly generate profit faster.

Conclusion:

The franchise agreement is a useful and powerful tool to expand a business while offering other businesses a low risk opportunity to make profit and established themselves. This is a legal process of building a trade relationship between two parties, one who wants to expand their business and another who wants to benefit from the reputed brand name with minimal investment. However success in franchising depends on choosing the right franchise, understand the legal terms and obligations. And maintaining a good relationship between franchisor and franchise. This ensure a long time sustainability. Whether you are a franchisor looking to expand your business or a new entrepreneur looking for profitable business options, this guide provide A-Z information on franchise business agreement for you. A franchisor needs to acquire trademark and company registration to build the foundation for establishing a franchise. This is a vital part to start your journey as a franchisor. For more information contact Online Legal India. We provide trademark registration and company registration service with complete guidance and within affordable price.