The franchisor and the other party agree to a number of terms in a franchise agreement. It legally obligates both parties to fulfill certain duties for the benefit of the other.
Compensation, timing, brand name usage conditions, etc. are all essential parts of a comprehensive franchise agreement. Therefore, you should take your time while drafting a franchise agreement to ensure that both parties gain equally.
Let us have an overview of the perfect franchise agreement, its benefits, formatting and more.
Franchise Agreement in India- Overview and it’s benefits
Franchising is difficult since it calls for both the franchisor and the other party to put in a lot of work in the form of planning, negotiation, drafting, and agreements. A franchise agreement is made up of the terms that both parties agree upon.
In this arrangement, the franchisor provides the buyer with access to their intellectual property, proprietary business systems, technical know-how, and training. The other party implements the foregoing with the end goal of increasing revenue for both parties.
In short, it’s a lucrative business model that lets local entrepreneurs run overseas enterprises with great success.
Six Key Benefits of Franchise Agreement
- Because franchise agreements are binding legal papers, they establish a contractual connection between both the parties.
- Since both the parties stand to gain from the business partnership, disagreements or breaches are unlikely to occur.
- Both parties have input into the franchise agreement’s terms and conditions, leading to a positive working partnership.
- Before signing a franchise contract, the franchisor can establish criteria for the upkeep of quality in many aspects of the business.
- The franchisor has control over the buyer’s implementation of the business model and brand identity thanks to the franchise agreement structure.
- The agreement specifies the consequences for mishandling or violating the company’s branding at any time.
To make you understand more, here’s what a franchise agreement format looks like.
This is just one of the many types of franchise agreements in India. Read below to know the different types of agreement formats.
Key Terms & Conditions of Franchise Agreement you must know
Some of the most significant terms usually included in franchise agreements are as follows:
- Royalties – The franchisor’s royalty structure is outlined in the franchise agreement. A franchisee must agree to the Franchisor’s terms in order to use his brand, such as the payment of a royalty or a flat fee.
- Franchise Term of Validity – The length of time for which the franchise agreement is valid is stated in the validity term. The Franchisee is informed that, for a predetermined time frame, he has the right to use the Franchisor’s trademark in marketing his business.
- Picking a location – The franchisee’s operating territory is laid out in the franchise agreement. The trademark’s owner and authorized users are listed.
- The site Analysis – The service’s site selection process is crucial. Franchisees typically provide a shortlist of potential locations where their businesses will be operated, with the Franchisor vetoing any unsuitable options.
- Franchise Costs – The costs associated with a franchise vary widely. The franchise fee, ongoing franchise fees, royalties, and any other applicable costs are included here. This contract also includes a provision for late fines and interest. The contract must account for all mandatory expenditures. The franchisee may be expected to pay for certain expenses, such as travel and training.
- Operational Support – Everything that needs to be done in terms of operations is laid out here. The agreement also details the franchisee’s product and service offerings. All mandatory expenditures made by a franchisee prior to the franchisor fall under the operational support requirement.
- Training Facilitation – Each Franchisee receives guidance throughout their learning process from the Franchisor. It analyzes the parent company’s history to ensure a seamless operation of franchises.
- Advertising – The Franchisor’s advertising duties to the Franchisees should be spelled out in detail in the Agreement.
- Conditions for Policy Renewal or Termination – The terms and conditions for renewal and termination of the franchise agreement are specified in the document. The franchisors insert an arbitration clause for their own protection against any illegal actions or breaches.
- Trademark – The franchisee has the legal right to utilize the franchisor’s branding elements, such as trademarks, the franchisor’s name, slogans, logo, service marks, signage, and designs.
- Confidentiality and Non-Disclosure – During the term of the franchise agreement, the franchisee gains access to the franchisor’s exclusive formulations, recipes, and methods of operation. The franchisor typically includes confidentiality terms, obligations, and limitations in the franchise agreement to ensure the secrecy of such information.
- Long-Term Commitment Contract – The franchise agreement will state how long the agreement will last. Franchise agreements typically cover extended periods of time. Franchisees and their investors benefit from the stability provided by long-term contracts with the franchisor. Since entering a franchise agreement involves an investment, it is wise to sign a contract with a lengthy term. This Agreement also includes the Renewal Terms & Conditions.
- Options for Renewal and Contract Cancellation – There may be a buyout provision in your franchise agreement. They can use this information to negotiate a better deal with the business owner or to purchase the property at the owner’s suggested price. The franchise agreement will detail the procedures for renewal and termination for the franchisee. Similarly, the Agreement can be finalized with the help of guidance and input from both sides.
- Insurance– During the term of the franchise, the franchisee will be required by the franchise agreement to carry specific insurance coverage. Franchisee is responsible for “indemnifying, defending, and holding harmless” the franchisor from any claims, including damages and expenses.
- Other Predicaments – The Franchise Agreement specifies the format and content of all notices, and they are conclusively presumed to have been sent once they are complete and in writing. The Franchisor also has an obligation to provide worker’s compensation insurance for all of its employees.
Types of Franchise Agreements
A few examples of franchise agreements are:
- Production Distribution Franchise Agreement
- Business Format Franchise Agreement
- Area Development Franchise Agreement
- Master Franchise Agreement
- Conversion Franchise Agreement
- Joint Venture Franchise Agreement
Of these the most commonly used is the Master Franchise Agreement.
Master Franchise Agreement – Overview and its components
The franchisor (the owner of the brand name) enters into a master franchise agreement with an individual or organization (the master franchisee) to hand over control of the franchising rights within a certain territory.
In exchange, the franchisor grants the master franchisee the right to own and operate multiple units and the right to sub-franchise the right to open units to other independent businesses (the franchisees) during a certain time period.
There are three parties involved in a master franchise agreement:
- Trademark holder franchisor,
- Operations manual,
- This franchise’s “master” franchisee.
Benefits of Master Franchise Agreement for the Franchisor
For the franchisor, master franchising offers many advantages:
- Enhanced income – Franchisor’s cash flow improves when master franchise is placed and maintains its presence due to ongoing fees.
- Rapidly scalable – This facilitates the company’s expansion into new international markets. The provisions of many master franchise agreements stipulate that the franchisee must build a certain number of stores within a specified time frame.
- Franchisors can save time and resources by not having to invest heavily in developing and launching new products and services in a foreign market.
- Brand expansion and improvement: Going global with your business might help you attract a larger audience and raise awareness of your product.
Trending: Read more about how homegrown brands in India are acquiring master franchises of international brands, aiming at major expansion plans across the country.
Franchise Agreement FAQs
Q.1. What are the three pillars of Franchise Agreement in India?
Payment of start-up and recurring royalties, adherence to the franchisor’s system and standards, and the granting of exclusive territory are the three pillars of any franchise agreement.
Q.2.What leads to termination of Franchise Agreement?
Default in franchise fee payment, failure to pay central/local marketing fund, trademark infringement, engaging in sub-franchising, and other violations of the franchise agreement are all grounds for termination by the franchisor.
Q.3 Who owns the rights of franchise agreement in India?
Franchisor owns the rights of the franchise agreement.
Q.4. Is there a difference between franchise agreement and license agreement?
In a franchise arrangement, the business itself is owned by the franchisor. For a fee, the franchisee operates the business on behalf of the franchisor. In a licensing arrangement, the licensee agrees to pay the licensor only for the use of the licensor’s patent on a specific product.
Conclusion,
The Franchise Agreement contains important terms and provisions. All the parts and pieces of a franchise agreement need to be described in detail. The franchised business could suffer if essential aspects are disregarded.
This is why it’s important to seek the advice of qualified professionals and attorneys. Experts hosted by Sparkleminds are prepared to provide a smooth process for their clients.
With Sparkleminds‘ assistance, you’ll have a fantastic time because we employ knowledgeable professionals who will walk you through the process step by step. We promise to always be available for you, and to provide service that is client-focused, dependable, and ethical.
