A specific agreement granting permission to utilise a franchisor’s exclusive knowledge, operational methods and Intellectual Property Rights is known as Franchise Agreement. Legal drafting and this arrangement empowers the business to offer products or services using the franchisor’s brand name. In return, the franchisee pays the franchisor an initial fee and recurring fees which could be payable in certain periods of time.
Suppose a business wants to expand its market share or geographical presence without incurring high costs. In that case, there is an option to franchise its product and brand name. It involves establishing a coactive partnership between a franchisor and a franchisee. The original Business’ owner grants the franchisee the authority to utilise its name and concept. In exchange, the franchisee buys the privilege to sell the franchisor’s product or services, seeing an established business model and trademark. This allows for mutual benefit and growth within the business model.
Types of Franchise Agreements:
These agreements can vary based on the negotiated terms and conditions among the franchisor (the party granting rights) and the franchisee (the party obtaining rights). Common types of franchise agreements are:
1. Single-Unit Franchise Agreement:
The most common and basic type of franchise agreement. It provides the right to operate a single franchised business unit at a particular location. The franchisor generally provides support, training and access to the brand and business model.
2. Multi-Unit Franchise Agreement:
Legal Drafting of franchise agreement provides the franchisee to operate multiple franchised business units in different location .The number of units are specified in agreements.
3. Master Franchise Agreement:
A Master Franchise Agreement also referred as Sub franchising provides the master franchisee to act as a sub franchisor in a particular location. The master franchisee could grant single unit or multi franchises to other franchisees , taking on the role of franchisor for that area .
4. Conversion Franchise Agreement:
It is for businesses already operating independently but decide to join a franchise system. This agreement allows the existing business to adopt the franchisor’s brand, systems and support.
5. Product or Trademark Licensing Agreement:
As in some franchise agreements it does not involve full business operations. It could be that some franchisors may offer product or trademark licensing agreements, here the franchisee is granted the right to sell some specific product or use the franchisor’s trademark within a defined market or territory.
6. Joint Venture Franchise Agreement:
Legal drafting joint venture Franchise agreements involve two or more parties forming a partnership for operating a franchise business. It results in shared responsibilities, risks and profits.
Various laws governing Franchise Agreements in India
All agreements are governed in India by Indian Contract Act,1872. It generally governs the principles of contract law, such as offer, acceptance, consideration, capacity and legality of the contract. Franchisors and franchisees should adhere to these fundamental principles while entering a franchise agreement.
Apart from Indian Contract Act, there are other statutes and regulations that have a note on franchise agreements in India. Some of the statutes are:
Competition Act, 2002:
This act aims to prevent anti competitive practices and to promote fair competition in the market. Franchisors shall ensure that their agreements should not lead to any abuse of market position or restrictive trade practices that can harm competition.
Intellectual Property Laws:
Most of the Franchise agreements involve licensing Intellectual Property Rights such as trademarks, copyright or patents. These rights are protected by various intellectual property laws such as the Trademarks Act of 1999 and the Copyright Act of 1957.
Consumer Protection Act, 2019:
Franchise Agreements are consumer contracts and protected by consumer protection act providing safeguard to consumer’s right and interest. It ensures that the terms of the franchise agreement are fair and transparent.
Foreign Exchange Management Act, 1999:
This Act regulates foreign investments, repatriation and remittances of funds for international franchise agreements. Franchisors and franchisees should comply with these regulations.
Tax Laws:
All the parties should adhere to various tax laws such as Income Tax act of 1961, The GST Act and other applicable state laws.
Labour Laws:
As, Labour is involved compliance with labour laws is mandatory such as the Employees Provident Funds and Miscellaneous Provisions Act of 1952 and the Industrial Disputes Act, 1947 is essential to protect the right of employees
Real Estate Regulation and Development Act, 2016:
As the Franchise involves a physical location/ property then this act comes into play, regulating real estate transactions and ensuring transparency in the real estate business sector.
Benefits of Franchise Business:
Here are some of the critical advantages of starting a franchise:
Proven Business Model:
It provides access to an established business model with a successful track record. As the franchisor has already refined its operation, marketing strategies and product/ services offerings, reducing the risk of starting a new business from scratch.
Brand Recognition:
It allows them to leverage the brand’s recognition and reputation. This saves you time and effort in building a brand, creating brand awareness and attracting customers, as customers are already familiar with the brand.
Training and Support:
Franchise model provides comprehensive training programs for franchisees. It covers various aspects of the business including the operations, marketing and customer support. Additionally franchisors offer ongoing support including guidance, marketing materials and operational assistance which can be valuable especially for first time entrepreneurs.
Access to Suppliers and Established Relationships:
Franchisors are already in the market and have established relationships with suppliers , which helps franchisees to secure reliable and cost effective inventory or raw materials sources. Being part of a franchise allows one to benefit from this network.
Marketing and Advertising:
As it usually have a centralized marketing and advertising strategy. It can invest on national or regional advertising campaigns that benefit all franchisees. This can be more effective and cost efficient.
Economies of Scale:
Franchise profit’s from scaling up the economy which means they can bulk up their inventory at reduced prices. As a franchisee, this acts as Cost savings.
Reduced Risk:
A business always carries risk. But franchises have a higher success rate than independent startups. The established brand recognition and ongoing support of franchisors help mitigate risks and increase the likelihood of success.
Entrepreneurial Freedom:
Although franchises operate within a predetermined business model, they offer entrepreneurial freedom. As a franchisee, you can run your business, make operational decisions within the franchise guidelines, and expand your business by opening additional franchise units.
Key Inclusions in a Franchise Agreement:
A franchise agreement is a legal drafting & binding agreement that outlines the terms and conditions to which both the parties must adhere to throughout their business relationship. While the specific details of a franchise agreement may vary depending on the industry and the franchisor’s policies, certain key inclusions are typically found in most franchise agreements:
1. Franchisee Obligations:
This may include business operation requirements, adherence to the franchisor’s standards, maintaining proper bookkeeping and financial records, and maintaining the business premises.
2. Franchisor Support:
This may include initial training, ongoing support, marketing assistance, and guidance on best practices for operating the business successfully.
3. Initial Franchise Fee:
The franchise agreement will specify the initial fee that the franchisee must pay the franchisor to acquire the franchise’s rights. This fee often covers the costs of initial training, access to the brand, and other resources the franchisor provides.
4. Royalty and Marketing Fees:
Franchise agreements typically outline the ongoing fees that the franchisee is required to pay to the franchisor. This may include royalties, a percentage of the franchisee’s gross revenue, and marketing fees, contributing to national or regional marketing efforts.
5. Territory and Exclusivity:
The agreement may define the territory or location where the franchisee is authorized to operate. It can also address whether the franchisee has exclusivity within that territory or other franchise locations operating nearby.
6. Intellectual Property and Branding:
The franchise agreement outlines the franchisor’s rights to the brand name, trademarks, logos and other intellectual property. It will also specify how the franchisee can use these assets in business operations.
7. Duration and Renewal:
It provides details of the term of the franchise agreement, initial term of the franchise agreement and the conditions for renewal if the franchisee wishes to extend the agreement beyond the initial period.
8. Termination and Transfer:
The agreement outlines the circumstances under which either party can terminate the agreement and the process for transferring ownership or selling the franchise.
9. Non-Compete Clause:
The franchisee may be restricted from engaging in similar business activities that compete with the franchisor during the term of the agreement and for a specified period after its termination.
10. Dispute Resolution:
It addresses how disputes between the franchisor and franchisee will be resolved, whether through arbitration, mediation, or litigation.
11. Modifications and Updates:
The agreement may include provisions allowing the franchisor to make updates or modifications to the franchise system, standards, or policies and how these changes will be communicated to the franchisee.
12. Confidentiality and Non-Disclosure:
Both parties may be required to maintain the confidentiality of proprietary information and trade secrets shared during the franchise relationship.
It’s essential for potential franchisees to review the franchise agreement carefully, seek legal counsel if necessary, and fully understand the terms and obligations before committing to the business relationship.
Conclusion:
India has a robust legal framework governing various aspects of business, and franchise agreements are no exception. A franchise agreement is a contract between the franchisor and the franchisee that outlines the terms and conditions under which the franchisee can operate a business using the franchisor’s established brand, products, and business model.
Legal Drafting these agreements play a crucial role in shaping the franchise relationship between the two parties and ensuring the smooth functioning of the franchise system.
Adhering to the relevant legal drafting laws and norms ensures compliance and fosters a healthy and sustainable franchising ecosystem in India. It’s important for both franchisors and franchisees to carefully have a legal drafting review and negotiate the terms of the franchise agreement to ensure that both parties rights, obligations, and responsibilities are clearly outlined and aligned with their respective business goals. Seeking legal counsel is highly recommended to ensure compliance with relevant laws and protect both parties interests.
