What is a Franchise Agreement?
A franchise agreement is a legal, binding contract between Franchisor and Franchisee. Hence in a franchise agreement, the franchisor would grant the exclusive right to the franchisee to utilise all the services, products and proprietary marks for a particular period of time. As a result, the franchisee would have to pay a certain amount of profit or revenue to the franchiser.
The franchise contract shall define the brand name that will be used; the length of franchise agreement, clauses dealing with penal provisions, ranging from fines, compensation, and cancellation of the franchise.
The Indian franchising industry has seen vigorous development over the previous decade. In spite of the financial subsidence, the yearly development rate of the franchising business in India has stayed positive and is as of now pegged at 30%-35%.
Who are the Parties in a Franchise Agreement?
There are typically two parties in a Franchise Agreement:
Franchisor is an individual or a company that grants specific permission to use the products, services and proprietary marks of the franchisor for a particular period of time. Such period can be stated in the Franchise Agreement.
Franchisee is an individual or company that secures the right to use the name of the franchise to market the services and products for the franchisor.
Advantages of Franchise Agreement
The following advantages can be secured by entering into this form of agreement:
A franchise agreement allows one to access the trademark, business logo, the products and all of the marketing expertise that a franchise has to offer. One of the main advantage secured from a franchise agreement, is the franchisee can utilise the trademark and logo of the franchisor to conduct business.
Control of the brand:
The franchiser after entering into the contract shall be able to specify the terms and conditions of the usage of brand, penalties and rules and regulations are clearly defined.
An individual entering into a franchise agreement would not need to market the products and services carried out by the franchisor. The business would already be reputed in the minds of the public. Hence it would be suitable to go for this form of arrangement where reputation is already present.
Utilisation of Resources:
Any individual or company going for a franchise agreement would secure the benefits of utilizing the resources of the franchiser. This will include all the logos, trademarks, products and services of the franchisor. The applicant would not have to start the business and secure products and services. All these would be provided during the engagement
What is the importance of a quality franchise agreement?
'Quality' of a franchise agreement might be surveyed on various parameters including: clearness in the specified reason, comprehensive/loophole free character and unambiguous.
The way of presentation of the franchise agreement is crucial for both the parties. Scope has to be provided to avoid any legal loopholes in this agreement. A franchise agreement is an agreement between the Franchiser and the franchisee which characterizes their relationship, rights and commitments.
A quality franchise agreement must express the relationship between the franchisor and the franchisee. All the rights and duties of the franchisor and the franchisee must be clearly mentioned in the franchise agreement. If all the information is clearly mentioned in the franchise agreement, then there would not be any scope of error or omissions.
What Are The Key Points in Franchise Agreement?
- Relationship between Franchisor and Franchisee- First and foremost it is crucial to mention the relationship between the franchisor and the franchisee. Under this head, the ownership details must be stated between the parties. If such information is stated, then there would be no space for any confusion to arise.
- Duration- Usually this is one of the most crucial clauses to be included in the franchise agreement. The duration would be the time period which the franchisor allows the franchisee to utilise the products and services of the franchise. Here also information pertaining to the renewal of the franchise agreement must also be stated.
- Fee for Franchise- The provisions related to the fee must be stated in the Franchise agreement. Usually this fee would be a continuous amount paid by the franchisee to the franchisor.
- Roles of Respective Parties- The franchise is an agreement to utilize the logo, services and the marks of the Franchisor for a particular period of time. However, such periods have to be mentioned in the franchise agreement. The roles and responsibilities of the franchisor and the franchisee must be mentioned. It is crucial to mention such information to get clear roles in the business.
- Intellectual Property- Intellectual property would include all the trademarks, copyrights, patents, designs and logos of the company. While granting the franchise to the franchisee, the franchisor has to specifically mention which intellectual property rights are assigned to the franchisee or licensed to the respective franchisee. Here also the provisions of breach for unauthorised use age of intellectual property rights must be mentioned in the franchise agreement.
- Development of the Commercial Site- In the franchise agreement, it has to be mentioned if the commercial site which is used for the franchise purposes would be developed by the franchisor or the franchisee. Such details must be mentioned in order to avoid any form of future issues or disputes. If the franchisor does not want to take any responsibility of the development, then the same must be mentioned in the franchise agreement.
- Confidentiality- If there is some information which is confidential, then this must be stated in the agreement. Under such section, the clause for any form of breach of confidentiality must be included in this section. Ensure that the terms related to confidentiality clauses are vetted thoroughly by a lawyer.
- Reimbursement Provisions- Be careful of the loss or harms that are not caused specifically by the acts of you or your representatives. You may ask for clause, which does not expect you to reimburse the franchisor in the case, if you follow the methodology and arrangements of the franchisor.
- Advertising- Arrangements that expect you to spend a sum or some percent of sales on publicizing might be brought down amid your initial couple of years of operation.
- Products Sold- Restrictions on the products that you wish to sell. There would be specific amount of products which are sold by the franchisee. The franchisor has the ability to restrict the type of products which are sold.
- The Transfer and Assignment Section- Be certain that your lawyer deliberately audits this segment and that you comprehend your duties and rights.
The above clauses must be vetted properly by the parties before going ahead with the agreement.
These are few portions which must be negotiated while making the franchise arrangement. Ensure that before you sign on the "dotted line" you completely comprehend your commitments and are alright with the last franchise agreement.
What does franchise agreement include?
The franchise agreement is a contract between the franchisor and the franchisee. Before signing the franchise agreement it is mandatory to go through the FDD i.e. Franchise Disclosure Document.
FDD gives clear data about what one could anticipate from the settlement, the franchisor and the franchisee's name, the sort of franchise that is being purchased, details regarding past execution of the franchisor with the project, the region, promoting and publicizing strategies and the sort of help that would be reached out to the franchisee and other important data as well.
There are few aspects in the franchise agreement that you have to give more concentration up on. The underlying expenses, the franchisee's commitments, litigation's, franchisor's commitments and income claims are few such aspects. You must learn about the financial performance of the business to get a clear picture by this document. A good franchise agreement will contain all these and numerous more which will make your relationship with the franchisor a transparent one.
The FDD is more like a due diligence agreement between the franchisor and the franchisee. All the points related to the franchisee agreement must be clearly stated in the FDD.
What points you must check before signing the franchise agreement?
The franchise agreement is the absolute business connection between the two parties the franchisee and the franchisor. There are few points to check before enforcing the agreement:
- Domain Guidelines-Certain websites are assigned in which the franchisee may work together. The ownership details related to the domain must be mentioned properly.
- Charges Payable to the Franchisor- This would include the fixed amount of fee paid in the franchise agreement. Details relating to the payment of fee must be mentioned in the franchise agreement.
- Services provided by the Franchisor- The franchisor has certain duties to carry out in the franchise agreement. The services provided by the franchisor must be stated properly. Some of the services would include training the staff on using the products and machinery of the franchise.
- Renewal of Agreement- The particular time frame of the agreement is defined here, and also the details related to the renewal. Duration is somewhere about to 5 and 20 years.
- Publicizing And Promotions- The franchisor must support the content, appearance, and recurrence of publicizing executed by the franchisee.
- Transfer Rights-Franchisors commonly maintain whatever authority is needed to endorse the terms of any exchange and the transference. Likewise, franchisors determine that they have the privilege of first refusal or to purchase back a franchise.
Since franchise agreement is the coupling contract between the franchisor and the franchisee, we usually suggest that must employ an experienced professional to audit the franchise agreement. A lawyer who is inexperienced with the laws won't meet all the requirements to guarantee your complete understanding of the points of interest that are discussed in the franchise agreement.