A legal, binding contract between the Franchisor and Franchisee is legally known as Franchise agreement. The functionof a franchise agreement is to give franchisee an authority to use the fran..
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Overview Elements Benefits Listicles LawsFAQ
Overview of Franchise Agreement
A legal, binding contract between the Franchisor and Franchisee is legally known as Franchiseagreement. The function of a franchise agreement is to give franchisee an authority to use thefranchisor's system and proprietary marks to manage a franchised business. In laymen term, itis an agreement in which a well-established business (franchisor) decides to give its brand,operational model and other required support to another party called franchisee. Franchisor allowsthe franchisee to run a similar business in exchange for a fee and share in the income generated.This agreement contains the professional and legal terms and conditions that both the parties willshare in their tenure. Franchise agreement helps in maintaining a cordial relationship between thefranchisee and franchisor. The agreement contains the name of the brand, the length of franchiseagreement, and amount of fees, clauses that deals with penal provision, compensation andcancellation of the franchise. The Indian franchising industry is experiencing vigorous growth anddevelopment.
What Does Franchise Agreement Include?
A legal necessary paper between the franchisor and franchisee which defines the roles andresponsibilities of both the parties is known as Franchise Agreement. It is necessary to go throughFranchise Disclosure Necessary Paper (FDD) before signing the franchise agreement. FDD preciselymentions even the minute details of the agreement. It narrates what one can expect from thesettlement, mentions franchisor and franchisee's name, the sort of franchise that is beingpurchased, information in relation to past execution of the franchisor with the project, the region,promotional strategies and the kind of help that a franchisee may need to grow the business.
Franchise Agreement is a legal proof of broad deal between two parties. It contains information likefranchisee's commitments, litigation's underlying expenses, income claims. Gain a goodknowledge on the financial status of the business to clearly understand this necessary paper.
Elements of a Franchise Agreement
An Outline of the Relationship
A Franchise agreement covers the name of the people who are involved in the agreement, ownership ofthe intellectual property. The agreement also talks about the obligations of the franchisee tomanage their business as per the standards provided by the franchisor.
Duration of the Agreement
This clause tells about the course of the franchisor-franchisee relationship. Initially, franchiseeis asked to pay an initial fee to legally become a part of the relationship which is furtherfollowed by continuing fees to maintain their position.
Location and Territory
The Franchise Agreement also covers the location and territory allocated to its franchise. Though,the location allocated is different in each agreement. Franchise agreement defines two types ofterritories:
- Exclusive Territory
- Non-exclusive Territory
Exclusive Territory
Only one franchise is allowed in an exclusive territory zone. The franchisor does not have the rightto sell more than one franchise in that particular area. The territory assigned will remainexclusive to that particular franchise only.
Non-Exclusive Territory
In a non-exclusive territory, the franchisor has the right to sell more than one franchise in thatparticular territory.
Use of Intellectual Property
Trademarks, patents, and manuals are also the part of agreement, which is offered by the franchisorto the franchisee. The agreement also states the expected use of trademarks, patents, and manuals.
Advertising
Franchisors narrate the franchisees on the efforts to be put in for advertising the brand.
Insurance
All franchise agreements need the franchise to obtain insurance so that they can cover the functionsof their business.
Training
This section of the agreement mentions training provided by the franchisor which includes seminars,meetings, etc that the franchisor will ask the franchisee to attend.
Benefits of Franchise Agreement
Business Privilege
A franchise agreement gives you the power to access to the trademarked business logo, the productsand all kinds of marketing expertise that a franchise can provide you. Franchise agreement legallygives you the permission to use a known trademarked business name and logo as part of business plan.
Control of the Brand
Once legally coming into an agreement the franchiser shall be able to states the terms and conditionsregarding the usage of the brand, penalty to be imposed and rules and regulations to be followed.
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Types of Franchise Agreement
Single Unit Franchise Agreement
This is the traditional and most common form franchising. This kind of agreement issues the rightsand obligations regarding the establishment of the franchise. It also narrates the operations of thefranchise. Though, franchisees are responsible to invest in their own capital and use theirmanagerial skills to grow their business.
Multi-Unit Franchise Agreement
Franchisor has the right to issue more than one franchised unit to the franchisee, in other words,this agreement allows the operation and establishment of more than one franchise unit. But it isessential for the multi-unit franchise to have smart financial capability which works as animportant asset in the growth of the business.
Master Franchise Agreement
In this type of agreement franchisor grants the right for a specific country, region or continent,hence empowering the master franchisee to provide a full range of products and services of thefranchisor. Moreover, the master franchisee also has the right to recruit other franchisees. Thisway the master franchisee becomes a franchisor to those franchisees who joins the system through itsmaster franchise.
Points to Check Before Signing the Franchise Agreement
Domain Guidelines
Specific regions are allocated in which franchisee can work jointly.
Charges Payable to the Franchisor
This includes accumulated investment, franchise fee expenses, and when the eminences are to be paid.
Service Offered by the Franchisor
It covers required training, promoting duties, and the products and services provided by thefranchise to the customers.
Renewal of Agreement
The specific time period of the agreement is mentioned and it also contains information related tothe renewal.
Publicizing and Promotions
The franchisor should provide the content, appearance, and recurrence of publicizing implemented bythe franchisee.
Transfer Rights
Franchisors commonly maintain whatever authority is needed to endorse the terms of any exchange andthe transference. Likewise, franchisors determine that they have the privilege of first refusal orto purchase back a franchise.
Key Laws Governing Franchising in India
The Indian Contract Act, 1872
This act defines the law regarding the fundamental aspects of the agreement between the franchisorand the franchisee. The Indian Contract Act finalizes the principles such as offer and acceptance,consideration, breach of contract and various related activities.
The Competition Act,2002
Any arrangement in regards to production, distribution, acquisition, supply or control of goods thatmay happen to cause an adverse effect on the competition within the country is prohibited under thisAct.
Consumer Protection Act, 1996
This Act is formulated keeping the interest of consumer’s in mind. This act has given the rightto consumers to file a complaint against the franchisee and the franchisor. In case of any flaweither in the product or service a consumer can entertain the right to file a complaint against theunit. Consumer Protection Act protects consumers from unfair trade practices.
The Foreign Exchange Management Act, 1999
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 thisAct. The Indian government is improvising the laws which will help the international brands inopening and managing their franchise in India.
Frequently Asked Questions
A legal, binding contract between the Franchisor and Franchisee is legally known asFranchise agreement. . In laymen term, it is an agreement in which awell-established business (franchisor) decides to give its brand, operational modeland other required support to another party called franchisee.
In laymen term, it is an agreement in which a well-establishedbusiness (franchisor) decides to give its brand, operational model and otherrequired support to another party called franchisee.
Don't think too much about the answer; just explore thepossibilities of these questions:
- How is your experience with your first unit opening
- What are the result of marketing programs
- How much can you earn?
- If you had to do it all over again, would you still buy this franchise?
Franchising is a method of distributing products or services. Atleast two levels of people are involved in a franchise system: (1) the franchisor,who lends his trademark or trade name and a business system; and (2) the franchisee,who pays a royalty and often an initial fee for the right to do business under thefranchisor's name and system. Technically, the contract binding the two parties isthe franchise, but that term is often used to mean the actual businessthat the franchisee operates.
There are a number of aspects to the franchising method that appealto prospective business owners. For example, easy access to an established productand a proven method of operating a business reduces the many risks of opening abusiness. In fact, U.S. Small Business Administration and U.S. Department ofCommerce statistics show a significantly lower failure rate for franchisedbusinesses than for other business start-ups. The franchisee purchases not only atrademark, but also the experience and expertise of the franchiser's organization.However, a franchise does not ensure easy success. If you are not prepared for thetotal commitment of time, energy and financial resources that any business requires,you should stop and reconsider your decision to enter the franchise business.
In this type of agreement franchisor grants the right for a specificcountry, region or continent, hence empowering the master franchisee to provide afull range of products and services of the franchisor. Moreover, the masterfranchisee also has the right to recruit other franchisees. This way the masterfranchisee becomes a franchisor to those franchisees who joins the system throughits master franchise.
This Act is formulated keeping the interest of consumer's inmind. This act has given the right to consumers to file a complaint against thefranchisee and the franchisor. In case of any flaw either in the product or servicea consumer can entertain the right to file a complaint against the unit. ConsumerProtection Act protects consumers from unfair trade practices.
- Names, addresses and telephone numbers of other franchisees and a properdiscussion with them about the entire business, the customer response and thecompany support.
- Take proper advise on the franchise agreement.
- A fully audited financial statement of the seller if they are a ltd company or aprivate ltd company. If any other format, request for the information.
- The cost required starting and maintaining the business. Please make specialnote of working capital or ongoing costs which you may have to incur afterstarting the business.
- The responsibilities you and the seller will share once you buy a franchise.
- Litigation involving the company or its officers, if any.
- Again, use your professional support to examine all of these issues. Some of thecontract terms may be negotiable. Find out before you sign; otherwise, it willbe too late.
When there is foreign currency and foreign assets are include thisact comes into action. International brands like Reebok, KFC, Nike, controls andmanages their franchise in India with this Act. The Indian government is improvisingthe laws which will help the international brands in opening and managing theirfranchise in India.
You could research and invest in a wide variety of national andinternational franchise opportunities, agencies, dealerships, distributorships andexisting franchises on sale.
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