What is a Franchise Agreement?
A franchise agreement is a legally binding document that outlines a franchisor’s terms and conditions for a franchisee. The party that franchises their already well-developed business model is called the franchisor and the party that agrees to certain terms and conditions in order to create their own franchised business is called the franchisee. In the agreement, the franchisor lays out the expectations and requirements for a franchisee to run a business under their brand name.
The franchise agreement format will characterize the foundation of the terms between both the consenting groups, define the remuneration for the franchisee (payment in the way of royalties, for the usage of the business trademark, etc), mention conditions upon the usage of the brand name, specify the extent of the agreement, mention terms concerning disciplinary provisions and so on.
Applicable Laws
- Franchise agreements in India are subject to the Contract Act, 1872 for general contract principles. The intellectual property rights are also protected under laws such as Copyrights Act and Trademarks Act.
- Any arrangement in regards to production, distribution, acquisition, supply or control of goods that may happen to cause an adverse effect on the competition within the country is prohibited under the Competition Act, 2002.
- In case of any flaw in the product or service a consumer has the right to file a complaint. The Consumer Protection Act protects consumers from unfair trade practices.
- When there is foreign currency and foreign assets, The Foreign Exchange Management Act, 1999 comes into place
Benefits of a Franchise agreement
- Defines The Guidelines
- A franchise agreement permits the businessman (who is franchising his company) to define guidelines for the maintenance of quality related to different facets of the trade before onboarding the client and binding them in a franchise contract.
- Business Privilege
- A franchise agreement gives you the power to access to the trademarked business logo, the products and all kinds of marketing expertise that a franchise can provide you. Franchise agreement legally gives you the permission to use a known trademarked business name and logo as part of business plan.
- Brand Management
- With a franchise agreement format in place, the franchisor can set guidelines for how the franchisee adopts the business and branding. Also, The agreement defines the penalties for mismanagement or violation of the business branding in order to protect the brand name at all times.
- Exercise Legal rights
- It acts as evidence that expresses the duties and rights which the parties have agreed on.
- Intellectual Property Rights
- The agreement clearly distinguishes the ownership rights and usage rights of a trademark.
What should a franchise agreement include
The most essential elements of a franchise agreement sample are as below-
- Franchisor-franchisee details and relationship
- This includes the parties to the contract, the ownership of the intellectual property (IP), and the overall obligations of the franchisee to operate its business to brand standards.
- Agreement duration
- It is the decided tenure of the franchisor-franchisee relationship. The duration is extendable if both parties wish to continue the relationship further.
- Franchisee fee and related matters
- Franchisees generally pay an initial and continuing fee to the franchisor for entering into the system and remaining a franchisee. Agreements also typically include a number of side fees.
- Assigned territory
- The specifics about the territory must be defined. Franchisors also needs to deal with reservation of their rights within a franchisee’s territory, including alternative distribution sites and sales over the internet.
- Business operations
- This details the information about the support to be extended by the franchisor and the responsibilities of the franchisee.
- Branding and advertisement
- It also mentions the responsibility of the franchisor to spend in branding and promotional activities to help the business. It also mentions the responsibility of the franchisee towards brand building activities.
- Intellectual property and trademark
- This section mentions the use of intellectual property (patents, trademarks, manuals, etc) of the franchisor by the franchisee.
- Initial and ongoing training and support
- Franchisors generally provide a host of pre-opening and continuing support, including training, field, and headquarters support, supply chain, and quality control.
- Termination clause
- This details the provisions related to the termination of the franchise agreement if either party fails to perform as per the terms mentioned in the agreement.
- Insurance requirements
- Franchise agreements define the minimum insurance a franchisee is required to have prior to opening and during the term of the agreement.
FAQs
A franchisor is any business, which has a parent company that provides a basic business model and brand name. The parent company loans these principles and brand image to a third party, known as a franchisee. While the franchise is owned, operated, and managed by individuals, the entire process is overseen by the larger parent company, which is usually an MNC.
No. India does not have separate laws that deal explicitly with franchise business models. However, we do have laws regarding how they must function. But several enactments help control and regulate the functioning of franchise businesses in India.
When there is foreign currency and foreign assets are include this act comes into action. International brands like Reebok, KFC, Nike, controls and manages their franchise in India with this Act.
Hey @HarshitShah
Yes. Any time the terms of the agreement change, this should be documented in a new contract. The new contract should also make clear this contract replaces the old contract.