14 Important Components Of A Franchise Agreement
14 Important Components Of A Franchise Agreement
It is without a doubt profitable to invest in a franchise business opportunity in India, but given the tested business strategy, opening a franchise outlet is no easy task. You must be aware of the complexities of a franchise agreement since it contains a number of important legal provisions and there is no going back once the contract is signed.
Let’s explore the definition of a franchise agreement and its essential elements in more detail.
What exactly is a franchise contract?
In a nutshell, a franchise agreement is a legally binding agreement in which a well-known company (known as a franchisor) grants licence to another corporation to use its name, trademark, operational model, and continuous support (known as a franchisee). In return, the franchisor gets regular royalties in addition to the initial franchise price.
The Franchise Disclosure Document typically contains the franchise agreement. It specifies the business, monetary, and legal responsibilities for the franchisor and franchisee.
4 Different Forms of Franchise Agreements
- Single Unit Franchise
- Multi Unit Franchise
- Area Development Franchise
- Master Franchise
Franchise agreements come in a variety of forms, and the nature of each type differs greatly from industry to industry. On this are a few well-known and often used kinds.
Single Unit Franchise
In a single-unit franchisee agreement, just one unit is granted the right to operate.
Region: A single unit may be granted a short operating radius and an exclusive territory.
Participation level: These franchisees, who also go by the name owner-operators, are deeply involved in every aspect of the business.
Multi Unit Franchise
Multi-unit franchisees are those who own more than one unit under their brand. These units could be provided to them with a lower beginning cost. Typically, if a franchisee owns many units, this denotes that the business is flourishing.
Region: For these kinds of franchises, there is often no exclusive territory. Franchisees are allowed to operate one location in one area of the city and another one in a different area.
Participation level: Due to managing many units, the franchisee isn’t as active in the unit’s operations.
Area Development Franchise
The franchisee is given permission to launch a set number of franchises in a particular region. The opening of franchises often has a schedule that must be followed. To keep the franchisee’s exclusivity, they must stay on course. An area development franchise receives a discounted rate for both the startup and royalty costs rather than being required to pay the same franchise charge.
Territory: The franchisee has the exclusive territorial rights so long as the schedule is followed.
Participation level: To guarantee the initial store’s success, the franchisee should be actively involved. Once numerous sites are operational, they become more managerial and less hands-on.
A master franchisee, who covers a considerably bigger territory than an area developer, is sometimes referred to as a regional developer. The distinction is that master franchises can offer single, multiple, and area development franchisees and generate revenue from such sales in addition to having lower starting and royalty fees. Additionally, they get a share of recurring royalties. The distribution of goods and real estate holdings may also provide additional revenue. Master franchise agreements are the most sought-after of the bunch because of the numerous income streams and the high ROI.
Territory: This can refer to a sizable region, a single state, a group of states, or the entire nation. The master franchisee must adhere to the development timeline in order to acquire exclusivity.
Participation level: The master franchisee often manages one location while also selling other franchises, hiring a manager to oversee operations. They serve as advisers to businesses.
A Franchise Agreement has 14 essential components
- Franchise Grant
- Date of launch, exclusive rights, and other terms
- Startup costs, royalties, and items purchased
- Franchise Period and Renewal
- Franchiser Assistance
- Protection of Private Information and Intellectual Property
- Specifications for Quality Control
- Transfer of Interest
- ViolationsUpon Termination or Expiration of the Agreement, Obligations
- Relations between the Franchisor and Franchisee
- Clause of Indemnification
- Clause of Non-Competition
Even while every franchise agreement is unique, a few essential components are always included. Before beginning your entrepreneurial adventure in the franchising sector, it’s a wonderful idea to become familiar with the following terms:
Possibly the most important portion is the one titled “oeGrant.” This informs franchisees that they have a limited, non-exclusive, non-transferable right to use the franchisor’s trademarks, logos, marks, and business model for the duration of the agreement. The authority to revoke the franchise agreement due to a breach always rests with the franchisor; the franchisee does not control the trademarks or the operating system.
Date of launch, exclusive rights, and other terms
The terms of the franchise agreement include the deadline that the franchisee must open their facility. This section also discusses the franchisee’s assigned region, whether exclusive or not.
Startup costs, royalties, and items purchased
The beginning costs, continuing costs, and the cost of the franchisor’s advertising and marketing services are all specified in this section for the franchisee to pay. The conditions of the revenue or profit sharing agreement between the franchisee and the franchisor are the other important information in this paragraph. Additionally, it informs the franchisee of the needs for company operations.
The responsibilities of the franchisor toward the franchisee are outlined in this document. It describes the type of franchisee advertising that will be done and the amount it will cost the franchisor.
Franchise Period and Renewal
This informs the franchisee of how long the franchise agreement will be in effect starting on the contract’s date. If the contract contains a clause for continued renewal, it also outlines the conditions that must be met.
Before and after business opens, franchisors may reaffirm the services and assistance they are willing to provide to franchisees. This covers all the coaching and assistance given to employees and managers both before and after the franchise’s term.
Protection of Private Information and Intellectual Property
It is critical to keep in mind that the franchisor is only issuing the franchisee a temporary licence. The precise terminology that declares each item to be regarded private, confidential, and a trade secret serves to cement this idea. The restrictions put on the franchisee’s ability to utilise the information are likewise made quite apparent. This is a crucial element that may be found in each and every franchise contract.
Specifications for Quality Control
There are certain quality control criteria set forth for the franchisees in order to guarantee that the products and services satisfy the high expectations of the original franchisor. These prerequisite requirements need to be upheld constantly.
Transfer of Interest
The right of franchise owners to sell their stake is often governed by franchise agreements. The requirements for this type of transfer are all listed in this section. The franchisor has the opportunity, but not the requirement, to exercise a first right of refusal and purchase the business if a franchisee wishes to sell their firm or if the contract has expired or been cancelled.
The franchise agreement often includes a thorough list of actions that might be considered a breach of the contract and result in contract termination. The infractions can be split into two categories: those that call for the agreement to be immediately terminated, and those that allow for correction.
Upon Termination or Expiration of the Agreement, Obligations
The agreement specifies the actions that must be followed by the franchisee to officially terminate the agreement after the period of the franchise expires, whether by expiry or termination. These phrases aid in dissociating the company’s affiliation with the original franchisor and the franchise network.
Relations between the Franchisor and Franchisee
Franchisees are treated by the franchisor as independent contractors rather than as employees. This implies that the franchisor is not permitted to ever treat them as an employee. An independent contractor runs their business for their own gain and does it as a separate legal person. They are thus need to file their taxes and recruit and manage their personnel separately. While executing out their respective contracts, the franchisee and franchisor must function independently.
Clause of Indemnification
This crucial provision is present in all franchise agreements. This means that franchisee will pay back the franchisor for any damages sustained by the franchisor as a result of the franchisee’s carelessness or malfeasance.
Clause of Non-Competition
This provision forbids the franchisee from establishing a company that would be seen as a direct rival of the franchisor. This is further divided into in-term and post-term, indicating that the franchisee is not permitted to launch such a business either during or after the franchise’s period.
Remember These Points Before Signing A Franchise Agreement
Before signing the franchise agreement, you must carefully read and review it. As a franchise business investor, you should take your time reading the agreement and perhaps even seek legal advice from a franchise agreement expert. When negotiating a franchise deal, bear the following points in mind:
Can you work something out?
Since the majority of franchisors are not amenable to negotiations, hiring legal counsel can be extremely beneficial. Find out honestly which provisions of the agreement are favourable to you and which are not.
What should you bargain for?
When you initially start your franchise, you might be able to acquire some additional help. You might also persuade them to pay the franchise price in instalments. Even the right of first refusal provision can be subject to change. Try to communicate your issues to the franchisor and offer suggestions for modifying the contract.
Watch out for warning signs
You should not sign the agreement if you are under any pressure or time constraints. Additionally, confirm that you have access to all franchise papers. Make careful to address any provisions you believe are unduly slanted in favour of the franchisor. The best course of action would be to think about engaging an Indian franchise consultant to assist you in evaluating the franchise agreement and reducing the likelihood of franchise fraud.
The franchise agreement should be treated as the holy grail by investors and businesses, who must carefully read it numerous times. Before signing on the dotted line, be careful to clarify any terms you are unclear about and ask questions if necessary. This can be a difficult process for new franchisees, but with the correct tools, you should be able to complete it without incident. Please fill out the Investor Enquiry form if you would want more information about franchise business possibilities in India.