Franchise Short Intro
If you are an Entrepreneur and got an option to choose either to work hard or work smart, what option you prefer? if you opt for Smart work, then the best way of expanding your business is ‘Franchise Module’. But to have a strong legal relationship a stringent agreement need to be signed between Franchisor and Franchisee.
Parties to Agreement:
Franchisor: The first party is a Person or organisation which grants the right to another parson to use its business, business modules, products etc. for some consideration in return.
Franchisee: The second party is the one who receives the right and also runs the business of the franchisor.
What is Franchise Agreement
It is a contract between two parties, the first party shall be the franchisor and the second party shall be the franchisee. The first party authorises the second party to do business in the name of the first party’s brand or trademark.
In consideration, the second party enjoys the franchise fee and share on revenue. Franchise agreement is the most important document in the franchise relationship. The franchise agreement speaks about the Terms and Conditions between both the franchisor and franchisee.
Why you should opt for Franchise Agreement
It is always advisable for every Franchise relationship to go with a properly drafted Franchise Agreement for the following reasons:
- Clarity on terms and conditions : Always a Franchise agreement will be useful for understanding the terms and conditions of the Franchise business. Further, the franchise is made for the mutual benifit of both the parties ie the franchisor and franchisee; hence they need to understand the roles and responsibilities of both the parties. In every franchise agreement, both, duties and responsibilities are the primary thing that need to be incorporated.
- Revenue details : As already discussed, the smartest way of doing business is Franchise module. It is obvious both the parties would be interested in making money. Hence it is important to get clarity on the payment details. Franchise agreement would help you by clearly explaining the Franchise fee, Royalty and other charges.
- Avoid loss of intellectual property rights : Intellectual property is the organisation’s most valuable asset in every organisation. Hence it is important to protect the same from any wrongful or unauthorised use.
- Avoid unnecessary Litigations : A properly drafted franchise agreement by the legal experts would make you free from legal complications.
- Long term relationship : When all the points were propetrly described and accepted, there is no question for bitterness in relationship. Hence there is a high possibility for long term contunious relationship.
Important Terms between Franchisor and Franchisee
Confidentiality: As the franchisor to disclose all the confidential information like Trade secrets, patent specifications, marketing strategies to the franchisee, the franchisee need to maintain the secrecy of the collected information as well as he should not use the same for unauthorised purpose.
Training: If the franchisor need to provide a standard quality service in all the franchise outlets, a proper training to all the staffs is mandatory. In the point of view of the franchisee, as he is to run the business, he need to be educated about many of the aspects and also the ‘Culture’ of the Franchise organisation.
Intellectual Property: As the IP is considered as one of the primary assert of the organisation, it need to be protected from unauthorised use. For instance, Trademark and Brand name to be used only by the proper way which is prescribed by the Franchisor as per the branding guidelines.
Arbitration Clause: Arbitration clause can be inducted so as to settle any dispute arising between the franchisor and franchisee in relating to the franchise business. This restricts the parties to move to the court for any dispute settlement. The judgement of the Arbitrator is final as related to any disputes.
Fee and Payment Clause: As already stated, Franchise fee to be paid upfront at the time of signing the agreement. Further the regular royalty to be transferred to the Franchisor as per the guidelines of the agreement. It may be monthly or quarterly or yearly depending upon the terms specified in the agreement.
Protection of Database: On termination, the data violation would be the threatening factor. The outgoing franchise may use the Client data for his own promotions or for some other personal use. This clasue would curtail the above said issue.
Territory and Franchise agreement
There are various types of Territorial Franchisees ie., District Franchise, Area Franchise, PinCode Franchise, Boundary Marked Franchise. Once a proper demarking of Franchising is done, the franchisee shall not operate outside the territory.
Boundary restriction is one of the primary aspect as related to Franchise agreement. As you all know Franchise is a module where the franchise can render service or sell the goods in the name of the Franchisor only within a restricted territory so as to avoid unnecessary dispute with the other franchisees.
Franchise Fee and Continuing Royalty
Franchise Fee is the one-time fee that is payable by the Franchisee to the Franchisor. It is the cost levied for joining the system and it is normally a huge sum collected for induction. The one-time fee is also named called as Principle Fee.
On the other hand the continuing Royalty is the fee collected on regular basis. It shall be usually on Percentage Basis out of the gross sales. For instance 12% out of the total sale done on every month. This is charged for utilising the brand and Intellectual Property of the Franchisor.
Common Problems in Franchise business
- To avoid any common problems arising out of the franchise business, the only solution is not to use Poorly drafted agreement. Have a clearly drafted agreement with the assistance of a Corporate lawyer who has sufficient knowledge on Franchise issues.
- The most common issues will be usually on non-payment, crossing the territorial jurisdiction, intellectual property violation.
Process for Termination
- Notice of Termination: If the agreement speaks about the notice period for termination of agreement, then a proper notice need to served to the other party. For example, if the agreement says, termination of agreement is possible by giving 30 days prior notice.
- Termination: After the waiting period, the agreement stands cancelled automatically.
How to Terminate a Franchise agreement
Grounds: The primary reason for termination shall be ‘Default’. Default is nothing but non-compliance of the terms of the franchise agreement. Non compliance shall be in two ways, one is not carrying out the duties and responsibilities as per the terms of the agreement; secondly violation of terms by doing something.
Non-renewal: The agreement stands dismissed on non-renewal after the term of the agreement
Bankrupt: If any party to franchise is Bankrupt or insolvent, then the agreement stands terminated without notice.
Underperformance: If the franchise agreement specifies about the performance criteria for the franchise like the certain sales volume or the turnover, and if the franchise didn’t comply with that, then the agreement stands terminated.
After franchise agreement termination
The post-term covenant covers the former franchisee after the franchise agreement expires or is earlier terminated because of an uncured breach.
What are the laws that Governs the Franchise relationship
There is no specific law like Franchise Law to govern the above said relationship. But it is governed by various legislations which are named as Indian Contract Act, 1872, Arbitration and conciliation Act, 1996 and Intellectual Property Laws. The Intellectual Property Laws has the classifications of Patent Act, 1970, Trademark Act, 1999, Copyright Act, 1957 and Design Act, 2000.