10 things to know before considering a Franchising Agreement

Disclaimer: Never rely on an online template. Get an expert to get yourself a Franchise agreement drafted!

Introduction

A Franchise is a set-up or arrangement where one organisation or a company follows the business idea, and business model of the parent company whilst also using the brand name of such parent company. In simpler terms, a franchise is essentially a business operating under an existing name.

In the franchise, there are two parties namely, the Franchisor (also called the ‘parent company) and the Franchisee (the individual owning a particular outlet of the franchise)While talking about a franchise, some of the popular names that may come to your mind are, McDonald’s, Dominos, Archies, Puma, Zara and many more. India is a ‘ Hot’ market for franchising.

Take a stroll through any Indian metropolis, and the thriving markets will welcome you with the best top brands. A franchise operates the same through its expansions, for example, the quality of a ‘Puma’ shoe you purchase in India will be the same had you purchased it in some other country.

Further, to float the boat of a business franchise, there must be a Franchise Agreement. A franchise agreement is a legally-binding document that sets out the rights and duties of both the parties involved, that is, the Franchisor and the Franchisee. A franchise agreement is a legal document that grants the franchisee a licence from the franchisor. A licence simply means that one party grants another party authorization to do or use something valuable.

10 THINGS THAT YOU MUST CONSIDER WHILE DRAFTING A FRANCHISE AGREEMENT

Disclosure

Both the franchise agreement and the disclosure documents capture significant information that will help a potential franchisee make an informed decision. The disclosure document, in particular, will highlight important confidential and valid data about the franchisor, the arrangement being offered, and the prerequisites for both parties involved. While the disclosure document discusses the franchisor-franchisee relationship, the franchisee agreement is the legally binding arrangement that regulates that relationship.

The Obligations of a Franchisee

This clause is one of the key highlights of a franchising agreement. Since the Franchisor is already established in the market there is a lot at stake for the franchisor while granting a licence to the franchisee. The obligations of a franchisee help to safeguard the interests of the franchisor in the agreement as a failure to carry out the franchisee’s obligation may inevitably harm the brand name of the franchisor. This clause contains details about the commencement date, location details, business promotion, and product details while maintaining the quality of the product, the sale price of the product and so on.

The Obligations of the Franchisor

The obligations of the Franchisor are always slightly higher than that of the franchisee owing to the fact that it is the franchisor who is lending the business model and name to the franchisee. This clause contains a permit which allows the franchisee to carry out the business under the name of the franchisor. Further, it also specifies the layout of the store, for example, the layout of the Zara store in India would be the same as in Australia. In addition to this, the franchisor must also supply a workforce to the franchisee whilst training them to work in the franchise.

Intellectual Property and Trademark Rights

The franchisee is granted the right to use the franchisor’s name, trademarks, service marks, logos, slogans, design concepts, and other branding indicators under the terms of the franchise agreement. Other intellectual property, such as the user guide and proprietary software systems, will also be granted by the franchisor.

Territories and Boundaries of the Franchise

This particular clause in the agreement is present to define the boundaries of the franchise. It lays down certain limits within which the franchise cannot be located. This clause ensures that there isn’t competition which would otherwise negatively impact the sales of the product.

The Fees and Cost of the Franchise

Aside from the initial price, this section of the contract includes the cost of owning a franchise, such as monthly remuneration, marketing, and other expenses. Many franchise contracts also specify how much money franchisees must have on hand prior to actually purchasing the unit so that franchisors can be confident that their franchisees will be able to manage everything from salaries to equipment maintenance and property preservation.

Franchise Renewal

A franchise agreement must contain a renewal clause which would enable the Franchisor and the Franchisee to renew their contract to continue the franchise.

Termination Policy

Specifics about how a franchise can be terminated are included. If a dispute arises between the franchisor and the franchisee, there may be an Arbitration clause that prevents either party from going to court unless an arbitrator first evaluates the case and makes a suggestion.

Term of the Franchise

A franchise agreement is typically for ten or twenty years. This section of the contract will also specify the terms under which the franchise can be sold to someone else, which may be rigorous in order to ensure that any future franchisee is qualified to be an owner. There may be a right of first refusal clause that allows the franchisor to repurchase the franchise rather than selling it to someone else.

Indemnification and Insurance

The franchise agreement will involve the franchisee keeping certain insurance coverage for the duration of the franchise. Expect indemnification provisions as well. For example, the franchisee is essential to “indemnify, defend, and hold harmless” the franchisor from any claims, costs, damages, or expenses arising from the franchisee’s activities. This is significant as the franchisee carries out the business under an already established business.