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Business Franchise - An Overview
Franchising is the practice where the business owner of an enterprise or company (franchisor) consents to another individual (franchisee) carrying out their own business under the title/brand name of the franchisor. In such a relationship, the franchisor offers their tools of business, technical know-how, intellectual property, and training to the franchisee. The franchisee applies the above and aims to profit both the franchisor and the franchisee. It is a profitable business model that allows domestic business persons to carry out successful foreign businesses within their country.
However, franchising is not an easy task as it requires a great deal of planning, negotiation, drafting, and agreements between the franchisor and the franchisee. The mutually understood terms that both parties reach leads to the formation of a franchise agreement. A franchise agreement is one legal document that is mutually agreed upon by the franchisor and the franchisee. It binds both of them into carrying out legal obligations for each other. An ideal franchise agreement includes various terms such as remuneration, timeline, conditions for usage of brand name, etc. Hence, it is important to be thorough with your franchise agreement so that the benefits out of such relationships are balanced.
Franchise Law in India
Franchising is a popular business model in India, where a franchisor licenses its business model and intellectual property to a franchisee in exchange for a fee. A precise franchise arrangement must be in place in order to safeguard the interests of both parties. There is no particular law in India that regulates licensing. However, franchising is subject to several laws, including the Indian Contract Act, 1872, the Competition Act, 2002, the Foreign Exchange Management Act, 1999, and the Trademarks Act, 1999.
Types of Franchise Agreements
There are several types of franchise agreements, including:
Product Distribution Franchise Agreement: This type of franchise agreement allows the franchisee to sell the franchisor's products in a specific territory.
Business Format Franchise Agreement: This type of franchise agreement allows the franchisee to use the franchisor's entire business system, including products, services, and trademarks.
Area Development Franchise Agreement: This kind of franchise arrangement enables the franchisee to set up and run numerous business locations in a particular region.
Master Franchise Agreement: This type of franchise agreement allows the franchisee to sub-franchise and sell franchises to other franchisees within a specific geographic area.
Conversion Franchise Agreement: This type of franchise agreement allows the franchisee to convert an existing business into a franchise of the franchisor's brand.
Joint Venture Franchise Agreement: This type of franchise agreement allows two or more parties to form a joint venture for the purpose of establishing a franchise system.
Format of Franchise Agreement
This Franchise Agreement (‘Agreement’) is made and entered into on [date] by and between [Franchisor’s Name], a [State] corporation, with its principal place of business located at [Address], (‘Franchisor’) and [Franchisee’s Name], a [State] corporation, with its principal place of business located at [Address], (‘Franchisee’).
WHEREAS, Franchisor is the owner of certain trademarks, service marks, trade names, and logos (collectively, the ‘Marks’) and has developed a successful business system for the operation of [Type of Business] businesses under the Marks (the ‘System’)
WHEREAS, Franchisee desires to obtain a license to use the Marks and to operate a [Type of Business] business in accordance with the System;
THEREFORE, the parties concur to the following:
Grant of Franchise
A non-exclusive permission to use the Marks and run a franchise is granted by the franchisor and accepted by the franchisee in this agreement. [Type of Business] business in accordance with the System at the location(s) specified in Exhibit A.
Term
This Agreement will initially be in effect for [number] years starting on [date], unless it is cancelled earlier in accordance with its provisions. Franchisees shall have the opportunity to extend this Agreement under the terms and conditions outlined in this Agreement for subsequent [number]-year periods.
Fees and Royalties
Franchisee shall pay to Franchisor the initial franchise fee of [amount] upon execution of this Agreement. Additionally, on a weekly or monthly basis, as decided by the franchisor, the franchisee shall pay royalties to the franchisor in an amount equivalent to [percent] percent of gross sales (as outlined in the operations manual).
Operations Manual
Franchisee acknowledges that the system is confidential and proprietary to Franchisor and that Franchisee shall have access to the System only as provided in the Operations Manual. Franchisee shall operate the business strictly in accordance with the Operations Manual and any updates or modifications thereto provided by Franchisor.
Advertising and Promotion
According to the franchisor's advertising and commercial standards, which are outlined in the operations manual or as otherwise conveyed by the franchisor from time to time, the franchisee must market and promote the company.
Termination and Default
In the event of a major breach of this agreement by the other party, which is not resolved within [number] days of receipt of written notification of such violation, this Agreement may be terminated by either party upon [number] days' written notice to the other party. Franchisor may terminate this Agreement immediately upon written notice to Franchisee in the event of Franchisee’s insolvency or bankruptcy, abandonment of the business, or conviction of a felony or other crime that impairs Franchisee’s ability to operate the business.
Assignment
Without the previous written permission of the franchisor, the franchisee is not permitted to transfer this Agreement or any stake therein. Any assignment effort made without this permission is invalid.
Governing Law
Without giving force to any choice of law or conflict of law provisions, the laws of the State of [State] shall regulate this Agreement and be followed in construing it.
Entire Agreement
All previous discussions, understandings, and agreements between the parties, whether written or oral, are superseded by this Agreement, which represents the parties' entire accord with regard to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
Franchisor: [Franchisor’s Name]
By: __________________________
Name: ________________________
Title: _________________________
Franchise
How to form a franchise agreement?
Forming a franchise agreement can be a complex process, and it is recommended that you seek legal assistance to ensure that the agreement is legally binding and protects the interests of both parties. Generally, the following steps are involved in forming a franchise agreement:
1. Conduct due diligence on the franchisor and franchisee.
2. Draft the franchise agreement.
3. Negotiate the terms of the agreement.
4. Finalise the agreement.
5. Execute the agreement.
6. Register the agreement with the appropriate authorities, if required.
What Should a Business Franchise Agreement Include?
An ideal franchise agreement should include the following clauses:
Details of the Franchisor and the Franchisee.
The detailed relationship of both the members is included in this clause. It is the first detail included in the franchise agreement draft.
Timeline and Validity.
This is the duration of the relationship between the franchisee and the franchisor. It is that period where the franchisee is allowed to see under the name and the mark of the franchisor. This duration can be extended if both have the agreement of the same.
Monetary Details to Be Included.
Franchise Fee - This is the amount the franchisee has to pay to obtain the trademark and business name of the franchisor.
Royalty - This is a fixed percentage that the franchisee has to pay to the franchisor on a monthly basis.
The amount and mode of payment for either is as per the discussions between the franchisee and the franchisor.
Site Selection.
It is the location or territory within which the franchisee is allowed to operate the business. The burden of finding the location is on the franchisee. This location is subject to the approval of the franchisor.
Business Operations.
This includes details as to how the franchisor expects the franchisee to run their business. Some of the areas they cover here will include:
The operation of the franchisee unit, as per the operating standards set by the franchisor.
The goods and/or services the franchisee is allowed to offer.
The goods and/or services the franchisee needs to purchase exclusively from the franchisor.
Advertising
This section of the agreement gives the franchisee the responsibility to market, advertise and other promotional activities.
Intellectual Property
It includes the use of the registration of trademark and intellectual property that the franchisor owns that the franchisee is allowed to use for the business operations.
Training
The franchisor is responsible to provide required support and supervision to the franchisee. It is done to make sure that uniformity is maintained among all franchised businesses.
Termination Clauses
It includes the terms that mention detailed provisions related to the termination of the franchise agreement. It is related to those where either party fails to perform as per the terms mentioned in the agreement. It also mentions penalties in the event of a franchise agreement is terminated.
How Franchise Agreements Work?
Legal arrangements known as franchise deals are made between a franchisor and a franchisee. The franchisor allows the franchisee to use its brand name, trademarks, products, services, and business model in exchange for payment of fees and adherence to certain rules and guidelines drafted and undersigned by both the parties in the Franchise agreement.
Here are the key points on how franchise agreements work:
1. The terms and conditions of the partnership firm registration between the franchisor and the franchisee are outlined in franchise agreements.
2. The franchisor provides the franchisee with instruction and continuing assistance in addition to granting the right to use its intellectual property and business system.
3.According to the terms of the contract, the licensee must pay the franchisor an upfront charge as well as continuing royalties and other costs.
4. The franchisee must adhere to the franchisor's rules and guidelines on how to operate the business, including marketing, advertising, pricing, quality control, and customer service.
5. Franchise contracts frequently have a duration of several years, with opportunities for renewal, and they may have terms allowing for termination, transfer, and non-compete agreements.
6. Both the franchisor and the franchisee have obligations and responsibilities under the agreement, and may have legal remedies if the other.
Benefits of a Business Franchise Agreement
1. As franchise agreements are valid legal documents, it binds the franchisor and the franchisee in a relationship where both have to adhere to specific provisions.
2. As both the franchisor and the franchisee get monetary and other benefits out of the relationship, there is little chance of dispute or breach of agreements.
3. The terms and provisions in the franchise agreement are mutually decided, this results in a healthy business relationship between both of them.
4. A franchise agreement permits the franchisor to define guidelines for the maintenance of quality related to different facets of the trade before onboarding the franchisee and binding them in a franchise contract.
5. With a franchise agreement format in place, the franchisor can set how the franchisee adopts the business and branding.
6. The penalties for mismanagement or violation of the business branding are defined in the agreement to protect the brand name at all times.
Royalty Fees for Franchise.
Royalty fees are a standard component of franchise agreements in India. These fees are typically a percentage of the franchisee's gross sales and are paid to the franchisor on a regular basis. The exact amount of royalty fees can vary depending on the industry, the franchisor's brand strength, and other factors.
Key Elements of a Franchise Agreement
The key elements of a franchise agreement typically include:
Franchise Grant: This section defines the franchise relationship and specifies the rights and responsibilities of both the franchisor and the franchisee.
Territory: The area in which the franchisee may run the company will be outlined in the license agreement
Fees: This section outlines the fees the franchisee will have to pay to the franchisor, such as an initial franchise fee, royalty payments, advertising fees, etc
Term: The franchise agreement will specify the duration of the franchise relationship
Operations Manual: This section details the procedures and guidelines for operating the franchise business, including training, product and service standards, marketing, and other business operations
Intellectual Property: The franchise agreement will detail the use of the franchisor's intellectual property, such as trademarks, logos, and other proprietary information
Termination: This section specifies the conditions under which the franchise relationship can be terminated by either party
Renewal and Transfer: The franchise agreement will detail the conditions and requirements for renewing or transferring the franchise
Dispute Resolution: The agreement will outline the procedures for resolving any disputes that may arise between the franchisor and franchisee.
Governing Law: This section specifies the laws that will govern the franchise relationship and any disputes that may arise.
Fundamental Provisions of the Franchise Agreement.
The sections that specify the important conditions and duties of the franchisor and the franchisee constitute the basic provisions of a franchise agreement. These clauses usually consist of:
Grant of Franchise: This section describes the franchisor's commitment to granting the licensee the right to make use of the franchisor's brand, operational procedures, and other intellectual property.
Territory: The region that the franchisee is permitted to function is specified by this clause.
Term And Renewal: This clause specifies the duration of the franchise agreement and the conditions under which it may be renewed.
Sample Clauses from Franchise Agreement
Some of the key clauses that are typically included in a franchise agreement are:
1. Grant of franchise rights
2. Term and termination
3. Fees and royalties
4. Obligations of the franchisor and franchisee
5. Training and support
6. Advertising and marketing
7. Intellectual property rights
8. Territory and exclusivity
9. Transfer and assignment
10. Governing law and dispute resolution
Parties Involved in Franchise Agreement
Franchisor: The party that owns the rights to a business concept and grants the franchisee the right to use its intellectual property, including trademarks, trade secrets, and proprietary business processes.
Franchisee: A person who pays the franchisor a fee in return for the privilege of using the franchisor's trademarks and running their company in accordance with the franchisor's published operating guidelines.
Subfranchisor: The owner may occasionally permit the licensee to sublicense the rights to run additional units of the company idea in different countries or regions. In this instance, the franchise deal would also include the subfranchisor as a participant.
Guarantor: A party that agrees to be responsible for the franchisee's obligations under the franchise agreement. This is typically required when the franchisee is a new business with limited assets or resources.
Lender: If the franchisee is borrowing money to finance the startup costs or ongoing operations of the franchise business, the lender may also be a party to the franchise agreement.
Typical Provisions of the Franchise Agreement
Franchisee Obligations: This clause outlines the franchisee's obligations, such as paying fees, following operating procedures, and maintaining quality standards.
Franchisor Obligations: This clause specifies the franchisor's obligations, such as providing training and support, marketing and advertising, and ongoing product development.
Fees and Royalties: This clause outlines the fees and royalties that the franchisee must pay to the franchisor, including initial fees, ongoing royalties, and advertising fees.
Termination and Default: This clause specifies the conditions under which the franchisor may terminate the agreement, and the consequences of default by the franchisee.
Transfer and Assignment: The terms of the franchisee's ability to transfer or sell the franchise, as well as the franchisor's authority to accept or refuse such transfers, are described in this section.
Dispute Resolution: This clause specifies the procedures for resolving disputes between the franchisor and franchisee, such as mediation or arbitration.
Governing Law: This clause specifies the jurisdiction and governing law that will apply to the franchise agreement.
Need for Franchise Agreement
1. Franchise agreements are necessary for those who wish to become franchisees and operate a business under the franchisor's brand name and business model.
2. Franchise agreements outline the rights and responsibilities of both the franchisor and franchisee.
3. Franchise agreements specify the use of intellectual property, payment of fees, and obligations for operating the business.
4. Franchise agreements are beneficial for franchisors as they protect their brand and ensure consistency in business operations by franchisees.
What are Common Franchise Terms?
Business Format Franchise: In addition to a trademark, a product, and a service, this kind of franchise also comes with all the necessary operating manuals and marketing strategies.
Disclosure Statement: The disclosure statement, commonly known as the Franchise Disclosure Document (FDD), includes information about the franchisor and franchise system.
FDD: The format for the disclosure document that informs the franchisee about the franchisor and franchise system is called the Franchise Disclosure Document, or FDD.
Franchise: A contract that specifies the franchisor-franchisee relationship, along with the usage of trademarks, charges, assistance, and management.
Franchise Agreement: The official contract in writing outlining the duties of both the franchisor and the franchisee.
Franchisee: The person or business who buys the franchisee's rights to use its trade name or trademark in order to do business.
Franchising: A strategy for business growth defined by the acquisition of a trademark license, the payment of fees, and substantial help and/or control.
Franchisor: The individual or firm that authorises the franchisee to conduct business using its trade name or trademark.
Product Distribution Franchisee: A franchise when the franchisee merely sells the items of the franchisor without employing the franchisor's operational procedures.
Royalty: The regular payment the franchisee makes to the franchisor, often expressed as a share of gross sales.
Trademark: The trademarks, brand name, and emblem used by franchisors and licenced to franchisees.
Legal Requirements for Franchise Agreement
Franchise agreements are legal contracts that outline the terms and conditions under which a franchisee may operate a business under the franchisor's brand name and business model. Depending on the jurisdiction, different laws may apply to franchise agreements, however the following general rules apply.
Some of the laws are :
The Competition Act, 2002: The Act forbids agreements relating to the manufacture, supply, distribution, storage, purchase, or control of commodities or the delivery of services that have a considerable negative impact on competition inside India or that are likely to do so.
The Indian Contract Act, 1872: It makes decisions on fundamental concepts like offer, acceptance, consideration, breach of contracts, and other activities at the most basic levels.
Income Tax Act, 1961: The corporation that benefits from Indian soil is required to pay the necessary taxes, according to the income tax legislation. This law also governs how international franchising operates.
Consumer Protection Act, 1986: The customer has a number of protections against deceptive business practices. The consumer protection legislation is put into effect whenever there is any product or service problem. A customer may submit a complaint under the consumer protection statute against both the franchisee and the franchisor.
Arbitration and Conciliation Act, 1996: In India, alternative conflict resolution is heavily marketed. Arbitration is a remedy to the overflow of litigation in Indian courts. The Arbitration and Conciliation Act broadens the definition of arbitration to include all disputes.
The Foreign Exchange Management Act, 1999: It controls payments made in foreign currencies. Many of the previous limitations on international franchisors' ability to impose specific fees without official clearance have been abolished by the Indian government.
The Trademarks Act, 1999, Patent Act, 1970, Design Act, 2000, Copyright Act 1957 : Any brand's trademark serves as its distinguishing feature, and in India it is legally protected by appropriate registration in accordance with the Trademark Act.
WHY with Abhinav Chandra & Team Legal ?
There are certain terms and clauses that make the franchise agreement a strong document. It is necessary to elaborate on all the ingredients and elements of a franchise agreement. If crucial details are overlooked it can affect the franchised business adversely. This is why the guidance of experienced professionals and legal experts is a necessity. Abhinav Chandra & Team Legal
is a leading organisation that hosts legal experts who are trained to deliver a hassle-free experience for their clients. With the help of Abhinav Chandra & Team Legal we will give you the best experience as we house experienced professionals with in-depth technical knowledge who will guide you at every step of the way. With service standards that are client-centred, reliable, and ethical, we will always be here to support you.
is a leading organisation that hosts legal experts who are trained to deliver a hassle-free experience for their clients. With the help of Abhinav Chandra & Team Legal we will give you the best experience as we house experienced professionals with in-depth technical knowledge who will guide you at every step of the way. With service standards that are client-centred, reliable, and ethical, we will always be here to support you.
Does a franchise agreement have GST?
Yes, a franchise agreement may include Goods and Services Tax (GST) obligations, which vary depending on the country and its tax regulations.
What does a franchise agreement mean in business terms?
In business terms, a franchise agreement establishes a legal relationship where a franchisor grants a franchisee the right to operate a business using the franchisor's established brand and business model.
What is the purpose of a franchise agreement?
The purpose of a franchise agreement is to outline the rights, responsibilities, and obligations of both the franchisor and franchisee, ensuring consistent operations and brand standards across multiple locations.
What are the laws governing the franchise business arrangement in India?
The franchise business arrangement in India is governed by various laws, including the Indian Contract Act, Consumer Protection Act, and specific regulations related to intellectual property, competition, and taxation.
What are the risks of a Business franchise?
There are three vital risks of a Business franchise,
Reputational Damage.
Joint Employer Liability.
FDD Compliance Issues.
What are the Initial documents required for a franchise in India?
The five initial documents required to start a business franchise in India are,
Franchise disclosure document
Franchise agreement
Operations manual
Franchise registration applications and notices
Financial statements.
When does a franchise agreement gets terminated?
The franchisors can terminate their franchise agreement on several issues like default in franchise fee payment, non-payment of central/local marketing fund, trademark infringement, indulging in sub-franchising, or due to any contravention of a franchise agreement.
What is ‘Buy Back’ in a franchise agreement?
Buy Back in a franchise agreement refers to the franchisor's right to repurchase the franchisee's business, equipment, inventory, and other assets at an agreed-upon price or valuation.
What role is the Consumer Protection Act, 1996 on Franchise Agreement?
The Consumer Protection Act, 1996 requires that franchisors provide full and accurate disclosure to prospective franchisees regarding the franchise opportunity, including information about the franchisor's history, financial performance, fees, and obligations. It also prohibits unfair practices in franchising, such as misleading advertising and misrepresentation of the franchise opportunity.
How does a franchise agreement differ from a license agreement?
A franchise agreement typically involves a more comprehensive relationship between the franchisor and franchisee, including ongoing support and training, advertising and marketing requirements, and ongoing royalties and fees. A license agreement, on the other hand, typically involves a more limited relationship between the licensor and licensee, granting the licensee the right to use the licensor's intellectual property for a specific purpose or product.