What is Franchise Agreement: What Is Regulatory Framework, Provisions & Benefits
A franchise agreement is a judicial agreement between the franchisor and the franchisee. A franchise helps a franchisee to run an already established business following specific rules pre-decided by both the franchisor and the franchisee. This is the reason why franchising is gaining popularity among freshers in business.
This article can answer your query if you are considering entering into a franchisee agreement. Read to know more.
What Is a Franchise Agreement for a Franchisor and a Franchisee?
A franchise agreement is a contractual business relationship. It allows a renowned brand developer (franchisor) to share its business format, strategies, branding and other benefits with another business owner (franchisee). In return, a franchisee pays a fee and royalties to the franchisor.
Attributes of Franchising Between Both Parties
Some attributes of franchising include:
- An agreement between a franchisor and franchisee with a specific period of operation.
- The franchisee must pay timely fees to retain the business license and operate the franchisor's business.
- Both parties should be equally advantageous to the agreement while franchising.
Terms Between Both Parties
One can develop this franchising agreement under several terms or arrangements. However, the most common terms of the agreement include the following:
- Franchisee business owners will follow the guidelines of the parent company or franchisor.
- A franchisor will provide its trademarks, business model, and expertise. In return, the franchisee company pays a fee or a percentage of its sales revenue.
- A franchisor company will let the franchisee sell or distribute its products. However, a franchisee must maintain its branding.
- The franchisee company will have the right to manufacture and sell products using the franchisor’s name.
What Is the Regulatory Framework of a Franchise Agreement?
As franchising entrepreneurship progresses, parties must formulate some enactments to maintain a smooth business flow. Unfortunately, no separate law governs all franchise agreements in India. However, some acts bind both parties, i.e., franchisors and franchisees. Some of these acts include:
- Indian Contract Act, 1872: Under this act, franchisors must reveal required business details to franchisees. Also, franchisees should maintain their existing faith while operating the business. Apart from this, it also holds the provision of agreement termination. It protects the owner with paid losses due to the violation of the contract.
- Copyright Act, 1957: This act includes an agreement confirmation with written and signed approval from both parties. Additionally, it holds the provision of royalties and other fees. Also, it ensures the franchisor’s trademark is valid and its right to utilise a territory for franchising.
- Patent Act, 1970: This act covers the law relating to the patent. In other words, it emphasises the protection of innovation and creativity.
- Consumer Protection Act, 1986: Under this act, a consumer can complain against the franchisor for business ill practices.
- Arbitration and Conciliation Act, 1996: This act solves a dispute between franchisors and franchisees as a mediator before appealing it to the court. It saves time and money for both parties.
- Trademark Act, 1999: It protects a business's trademark and branding name.
- Foreign Exchange Management Act, 1999: This act measures the fair exchange of foreign currencies within a franchise contract.
- Design Act, 2000: This act protects a product's design from copied design, shape, colour, patterns and more.
- The Competition Act, 2002: It prevents monopolies in India, which affects the market adversely.
What Are the Fundamental Provisions of a Franchise Agreement?
There are some fundamental provisions to benefit both the parent company and the franchisee. These fundamentals are:
- Selection of the Location: This provision entitles the limits of a franchisee’s location one can select for managing its business. Thus, it also means the franchisee must properly choose a place to operate the business with its franchisor’s approval.
- Franchise Duration: This provision defines the duration of how long a franchisee is going to continue.
- Royalty and Fees: Under this provision, both sides have to set royalty terms or discuss a percentage of sales. In exchange for these allotted fees, franchisees can use their franchisors’ trademarks to sell any product or service.
- Branding and Operations: Branding and operation provision covers the guideline that a franchisee will use its parent company’s branding, logo, signs, etc. Moreover, it outlines the progress of franchising, the authenticity a franchisee has to maintain and much more. It also says the franchisee business owner can manufacture using raw materials the franchisor has offered. For instance, a shoe franchise will make shoes with materials from its franchisor company.
- Training Instruction: Under training instructions, a franchisor must provide its guidelines to an extended owner to maintain consistency. This provision confirms both the goods/service providers are similar.
- Advertising: This provision says a franchisor will share every advertising strategy with its franchising partner. However, one franchisee also has to pay the fees for advertisements.
- Renewal and Cancellation: This provision is about the cancellation policy and renewal of franchising. Some franchising can have an arbitration clause, so reviewing every clause before signing for franchising is essential.
- Exit Policy: There is no recommended exit policy in a franchise agreement. However, a franchisor can set clauses for franchising resale or leave an agreement upon the franchisee.
What Are the Benefits of a Franchise Agreement?
A franchise agreement benefits both a franchisor and a franchisee in various aspects. These include:
- A franchisee can get a hold of an established business with a comparatively lower initial investment and avoid the risks of beginning a business.
- A company's franchise agreement helps develop a deep-rooted and proven perspective from the franchisor's expertise.
- One franchisee may generate as many sales and profit as the franchisor or even more using its trademark, capital and customer base.
- The franchisor regulates sales revenues and other fees provided by the franchisee.
- A franchisee gets expert guidance and support from its franchisor.
Every franchise agreement can have different sets of rules. It depends on the terms set by a franchisor and a franchisee, along with its business conditions. Also, the relationship shared between both parties decides how it will progress further. Therefore, knowing how these agreements are managed will help make wise decisions about a better agreement.