Global organizations are rapidly growing in an effort to tap into foreign markets. The franchise is a unique strategy that is mostly applied in the services industry. Any firm that uses franchising looks to be able to use the partnership of franchisee dedication and franchisor managerial competence. This strategy has shown to be a successful business strategy that includes both domestic and international players. There are several frameworks for franchising now in use.
What a franchise agreement
According to the CTN News, The Indian legal system does not define the term “franchise.” However, the Finance Act of 1999, which stipulates that a “franchise” is an agreement that grants the “franchisee” the right to sell or produce goods, offer services, or carry on with activities acknowledged by the franchise owner, provides a clue as to what it means. An official written contract between the franchisor and the franchisee is known as a franchise agreement.
The frameworks listed below are determined by the number of franchisors, the wide range of industrial sectors, as well as the level of pay:
- Single Unit Franchise – The far more convenient as well as traditionally common type of franchise model is indeed the single unit franchise (also known as a direct unit franchise). Under this, the franchisee obtains the right and obligation to develop and operate one franchise from the franchisor. In this, Franchisees will invest their wealth and use their managerial skills. For example– When a franchisee buys their first franchise, they are referred to as a single-unit franchisee.
- Multi-Unit Franchise – The franchisor provides an organisation (the multi-unit franchisee) the right and duty to launch and manage several franchised units under the terms of a multi-unit franchise. The franchisee consents to open a specific number of locations within a predetermined time frame. The multi-unit franchisee must be able to produce several units, both financially and operationally. For instance, a franchisee may elect to start a second, third, or even fourth franchise with the same franchisor if their first franchise is a success. If a franchisee owns more than one franchise unit, they are referred to as a multi-unit owner.
- Franchise for area development – This model is comparable to a multi-unit franchise. In accordance with this, the franchisor grants a business or organisation (the area developer) the right and duty to assist in the opening of several franchised units. For instance, area developers and multi-unit franchisees have the trait of having already agreed to the development of a set number of franchise sites within a given timeframe and geographic region. Franchisees who are looking for market exclusivity and have the financial means to negotiate such exclusivity with the franchisor are most suited for this strategy.
- Master Franchise – The master franchisee has the authority to construct and manage a number of locations in a certain region, as well as the right (and occasionally even the duty) to seek out and sign up new franchisees. For a specific nation, province, or region, the franchisor grants the authority to one entity (the master franchisee), allowing the master franchisee to provide a full range of services and goods through sub-franchising in a manner that is very similar to how the franchise owner runs its own business. A master franchisee, for instance, is comparable to an area developer in that they are obligated to open a set number of stores within a given time frame and geographic region.
Key Elements of a Franchise Agreement:
The following are the essential elements of a franchise agreement:
- Overview of the Relationship: First, the affiliation between the Franchisor and the Franchisee is explained. The contract details the parties involved, who owns the intellectual property, and the franchisee’s general obligations to manage the brand standards, among other information.
- Duration of Agreement: The time period covered by the franchiser-franchisee relationship. Franchisees often provide a franchise opportunity for 5 to 10 years. The duration of the connection is, in fact, one of the most crucial elements of the agreement. If things continue to go smoothly and they both really want to work together, it may even be extended.
- Franchise Fee: The agreement specifies the franchisee’s duty to pay a particular sum. When they first join the franchise model, franchisees often pay the franchisor an upfront and ongoing fee. The agreement specifies the number of additional costs. The quantity of money a franchisee gives the franchisor in exchange for the right to use the brand name, logo, and other elements of the franchise’s identity is known as the franchise fee.
- Business Activities – The most significant expense of owning a franchise business is the knowledge and experience of the franchisor. As a result, it is very important to supply all relevant details on the amount of assistance offered by the franchisor, as well as the franchisee’s other obligations.
- Site Development and Selection – Finding the best site for the franchise unit is the franchisee’s primary responsibility. Usually, the franchisee selects the desired site before opening the unit and waits for the franchisor’s permission. In addition, the agreement must include every detail about the site for it to be deemed a legitimate franchise unit of the business.
- Assistance and Training – Most franchisors provide training and support to franchisees. The company’s headquarters often offers this training beforehand and on an ongoing basis on a variety of topics, such as supply chain, product quality, and other management-related questions. The training duration and work schedule are specified in the franchise agreement.
- Utilization of Intellectual Property: Making use of part of the brand’s intellectual property is another key advantage of owning a franchise (as directed by the franchisor). The franchise agreement details the franchisee’s rights and obligations, as well as the franchisee’s use of the brand’s intellectual property and the franchisor’s platform development rights.
- Insurance: The minimum insurance coverage that a franchisee is required to have both before opening and for the duration of the contract will be outlined in the franchise agreements.
- Keeping records and having the right to examine the franchisee’s books: The franchisor outlines the records that franchisees are required to keep, the possible operating systems that they may employ, and the franchisor’s rights to access and examine that information.
- Agreement Renewal: One of the most overlooked provisions in the franchise agreement is the renewal provision. There is a termination date in every franchise agreement. Usually, this occurs after 10, 15, or 20 years. Franchisees can decide whether to completely stop operating franchise units or renew the agreement when the current term expires. The terms and conditions for renewing a franchise agreement are outlined in the renewal rights section.
- Termination: If the franchisee violates any of the responsibilities outlined in this agreement seriously or if any required payments are not made, at the latest within 21 days after the due date, the franchisor may terminate the agreement by sending the franchisee written notice.
- Resale of Franchise: When someone chooses to buy an existing franchise as a viable company from a franchisee who holds the franchise rights, this is referred to as reselling a franchise. It could involve the selling of a business or the franchisee’s stock. It is typical for a franchisee to be granted the right to sell its franchise business; however, the franchise agreement must be explicit about this.
- Other Provisions: The to-be-drafted agreement will also contain the franchisee’s successor rights, default, termination, indemnification, dispute resolution, resale rights, transfer rights, and rights of first refusal, as well as provisions for local advertising requirements, governing law, general releases, personal guarantees, and roll-up clauses.
Therefore, these are the fundamental elements of a franchise agreement, along with a few more clauses.