What Is A Franchise Agreement?

McDonald’s, Subway, and Starbucks are some of the most popular fast food chains globally. It is a dream of most small business owners to attain such global recognition. However, expanding businesses globally is not easy. The secret behind these brands’ success is its franchising business model. In India, the franchise business is gaining a lot of popularity recently. However, there are no particular laws that govern a franchise relationship. As a result, the parties opting to start a franchise business in India often opt for having a franchise agreement in place before starting business operations. You can get franchise agreement templates from any online legal drafting services provider. However, it is vital for both the parties involved to have a clear understanding of its components. Through this blog, you can get an idea on what is franchise agreement, its format, scope and types. 

What is a franchise?

Before we delve into the deep waters of drafting an effective franchise agreement, let’s take a look at the meaning of a franchise. A franchise is a joint venture between two parties, one of whom is looking for business expansion and the other wanting to start a business. It is also a very popular marketing technique. The process of opening a franchise between two parties is known as ‘franchising’. 

Franchise Business Example 

McDonald’s is a fast food chain based out of the USA. When Mcdonalds was successful in gaining immense popularity in the US, the owners started looking for options for expansion. Gradually, they started entering into franchising business with businessmen all around the world. In fact, Mcdonalds is also one of the earliest franchising ventures in Indian origin. The first McDonalds in India opened in 1996 at Vasant Vihar, New Delhi. 

Scope of Franchise Agreement

A franchise agreement is a legal contract that governs all aspects of a franchising business relationship between two parties, the franchisor and franchisee. The franchisor is usually a business entity that offers to license the right to conduct business and use his brand name, etc to the franchisee. Whereas, a franchisee might be an individual or a business entity that is desirous of opening an outlet of the franchisor’s business. The scope of a franchise agreement is as wide as protecting the interests of both parties. Hence, it is important to understand the duties of each party to the franchise agreement. 

Duties of the Franchisor

In a franchise agreement, the franchisor usually has the dominant position. Hence, his responsibilities are also more as compared to the franchisee. The franchisor licenses his right to use his business and affiliated connections in exchange of profit from the franchisee. To build a successful franchising business, the franchisor has following duties: 

• To license his Intellectual property rights to the franchisee; 
• Provide proper infrastructural, designing support, etc; 
• Set out standards of performance for the franchise;
• Provide training and related materials to the staff; and 
• Assist in advertising, creating brand awareness, etc. 

Duties of the Franchisee

The primary role of the franchisee is to run the franchisors business successfully in his territory. To reach this goal, he also needs to perform certain duties, which are: 

• Search for the location of franchise outlet;
• Hiring of staff;
• Running the day to day operations of the outlet; 
• Giving marketing related ideas; 
• Working on generating profit from the outlet; and
• Lastly, ensuring that the standards set by the franchisor are followed. 

What is the franchise agreement format? 

There are numerous franchise agreement template available on the internet. However, an ideal format of franchise agreement is the one that meets your specific needs. To get that, you can always connect with the experts at legalwiz.in and get your customized franchise agreement format. However, there are certain basic components integral to all types of franchise agreements. Let’s take a look at the basic format of franchise agreement: 

Party Details

To draft an effective franchise agreement, the franchisor and the franchisee must be clearly defined.  

Timeline and Validity of Franchise Agreement

The timeline for which a business outlet is being franchised must be mentioned in the agreement. Further, the terms of termination and extension must also be specified in the agreement. 

Confidentiality

Both the parties to a franchisee agreement are bound to share confidential information with each other. Hence, it is important to have a clause to define ‘confidential information’ and set measures to protect it. Considering the fact that you might be sharing your trade secrets with your franchisee, some popular brands enter into a separate non disclosure agreement along with the franchise agreements. 

Consideration

The franchisor provides the licenses certain aspects of his ownership in a business to the franchisee in exchange of a consideration. In a franchise agreement, there can be two different types of considerations; 

1. Franchise Fee: 

This refers to a fixed amount of fee that a franchisee is bound to pay to the franchisor for allowing them to open a business outlet. 

2. Royalties: 

This amount refers to a certain percent of profit from the franchising outlet that the franchisor is entitled to. 

Site Details

The franchise agreement must also cover the basic details of the site selected for opening the business outlet. This includes the area, address, etc. The onus of selecting the appropriate site after considering the market factors is on the franchisee. Besides, if the place is rented, having a lease deed is also advisable to avoid future risks. 

Marketing and Advertising

Franchisor is the original owner of the brand name and other intellectual property rights. So, in the franchise agreement, the owner needs to assign his rights to allow the franchisee to market and advertise his label. 

Operations and Training

Since the franchisor is the original owner of the brand. It is his duty to facilitate training of the franchisee and his staff as per his standards. Further, even though the franchisor is not responsible for the day to day operations of business, he can reserve his rights to conduct inspections, make suggestions for improvement of operations etc. through the franchisee agreement. 

IP Licensing

This is one of the most important clauses of the franchise agreements. Failure to draft this clause carefully, can lead to IP infringement battles. It is no secret that the franchisor has to license his intellectual properties while opening a franchise. However, the extent of these licensing rights, the rules, limitations, etc must be a part of the franchise agreement. 

• Fun Fact: In the USA, there are specific laws that govern franchising business relationships. 

Pro Tips on drafting an effective Franchise Agreement

Here are some tips and tricks that will help in building a successful franchising business relationship: 

• A background check of the parties, ie. due diligence will help in safeguarding rights; 
• You must go through all the aspects of the agreement thoroughly; 
• In case of redundancy, you must negotiate the terms before signing the agreement; and
• Lastly, have an expert review your agreement before execution. 

Conclusion

Franchising is one of the most popular ways of creating global awareness of a brand. Further, it also limits the liabilities and risks of the original owners and allows a chance of growth to the franchisee. Certain times, people enter into a joint venture agreement to open a franchise together. Hence, you could say that it is a perfect twist of dynamics from a joint venture. At legalwiz.in you can get all types of business solutions in just one click. Contact us and start your franchising journey today!