What is franchising? The definition for franchising given by the International Franchise Association (IFA) states that a franchise is “A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is required to maintain a continuing interest in the franchisee’s business in areas such as know-how and training; the franchisee operates under a common trade name, format, or procedure owned or controlled by the franchisor; and the franchisee has made or will make a substantial capital investment in his business from his own resources.” So, basically, Franchising means where the business owner of a company gives a license to another individual to carry out their own business under the title or brand name of that company. A franchise consists of two parties that are “franchisor” and “franchisee”. A franchisor is the owner of a business that provides its brand, trade name, product, service or any other form of intellectual property laws along with the value chain. whereas, franchisee is a person who receives the right to use franchisor’s business in exchange for a royalty and an initial fee. The franchise aims to profit both the franchisor and the franchisee. A business that is seen in different cities and known because of their brand sign and colors is the same all around the places where the franchise operates. For example, the quality and taste of domino’s pizza is the same no matter from where you buy it. Some other examples of a franchise are KFC, McDonald’s, Pizza Hut, Subway, etc. It is important for anyone deciding to start a business by becoming a franchisee to keep in mind that for franchising the franchisee is legally bound to a franchise agreement with the franchisor for a specified period of time. What is a Franchise Agreement? A franchise agreement is the base of a franchise. A franchise Agreement is a legally binding contract between two parties that are franchisor and the franchisee. It binds both the parties to carry out legal obligations for each other. The contract includes details of the franchisor’s expectations from the franchisee that how the business must be operated. It is an agreement where the franchisor consents to grant the company’s name or system to the franchisee. Essential elements of Franchise Agreement Details of both the Franchisor and Franchisee – The franchise Agreement should include all the details and information of both the parties entering into the agreement. Business operations – The franchise agreement should consist of information regarding the roles and responsibilities of the franchisee and how the franchisor expects the franchisee to run their business. The information should include details of the goods or services franchised, proper maintenance of accounts and other registers, standards of operations, and inspection of the said unit at regular intervals etc. Monetary Details to Be Included- Franchise Fee – Every franchise has its own fee structure. These fees include the original franchise fee, regular franchise fees, royalty fees, and other fees. Late fees and interest are also included in the agreement. Any mandatory expenses should also be covered under the agreement. For example, the franchisee may be responsible for travel expenditures, training, and other costs. Royalty – This is a fixed percentage that the franchisee has to pay to the franchisor on a monthly basis for the benefit to use his brand’s name. Also, mention the specific format in which it needs to be paid, the mode of payment, details of the concerned bank account, and the intervals of making payment (monthly, quarterly or annual payment). Location of the franchise’s operation – The Franchise agreement should clearly mention the location and the territory under which the said franchisee can conduct its business operation. This is an important step as the franchisor may franchise its business to several franchises in different locations. Duration of franchisee – The agreement should include the duration for which the franchise is lent or licensed to the franchisee. Also, it is important to mention that the franchise agreement is subject to renewal or termination post this period. Training support – The Franchisor provides training assistance to each Franchisee. It ensures that franchise businesses run smoothly and to make sure that uniformity is maintained among all franchised businesses. Intellectual Property Rights – The franchise agreement should include the way and the method in which the said franchisee can use the Copyright, Trademark, and Trade Secrets of the franchisor. It is important to note that this clause specifies the Intellectual Property Rights that the franchisee gets to use, manufacture, sell, and distribute the goods or services in the name of the franchisor and use the Copyrighted creation of the franchisor. Renewal clause – Agreement must mention whether the franchisor wants to renew the agreement after the completion of the tenure of a franchise or terminate it. It should also state the terms and conditions for the renewal. Termination Clauses – It includes the terms that mention detailed provisions related to the termination of the franchise agreement along with the grounds on which such a franchise may be declared canceled by the franchisor during the period of the agreement. It is done where either party fails to perform as per the terms mentioned in the agreement. It also clearly mentions penalties in cases where a franchise agreement is terminated. Resale of the franchise – The terms and conditions stated in the agreement must also specify whether any rights regarding the reselling the franchise is given to the franchisee or not. Non-Disclosure/ Confidentiality- A franchisee is aware of various trade secrets during the franchise agreement, including proprietary formulas and recipes and how the franchisor conducts the business. This information should not be disclosed and kept private ,the franchisor always states the confidentiality terms, deeds, and restraints in the franchise agreement. Advertising– This clause of the agreement gives the responsibility to the franchisee to market, advertise and other activities for the promotion. Applicable laws – the Franchise Agreement must also prescribe the laws applicable over both the franchisor and franchisee together with the legal action that can be taken by either of the..
