How to draft a Franchisee Agreement?

A Franchise agreement is a legally binding document that governs Franchisor and Franchisee and defines all rules and regulations related to franchise. There is no prescribed format for the Franchisee agreement as to the terms and conditions, methods of operations of various franchises depend upon the nature and type of business. The Signing of the Franchise agreement by both parties is also required.

In the United States of America, if three general requirements of the FTC Franchise rule set up by the Federal Trade Commission (FTC) are met by businesses than it can become a Franchise. Such requirements are:

• The businesses of both the parties i.e., Franchisor and Franchisee must be substantially associated and they must share a common brand.
• The assistance needs to be provided by the Franchisor to the Franchisee for the better conduct of business.
• The initial fees shall be received by the Franchisor from the Franchisee for the right to use Franchisor’s Trademark.

It is a kind of a license agreement which creates legal obligation between the parties and where one party allows another party to do something or use something of value. In this case of Franchising Agreement, the Franchisor allows Franchisee to use its Intellectual property, its brand, etc. This agreement is made to protect the Intellectual property rights of the Franchisor. This agreement should be flexible enough so that modifications can be done at a later stage, if required.

Who are Franchisor and Franchisee?

Franchisor– The ‘Franchisor’ is the person who owns the Trade mark and allows the use of it to the Franchisee in exchange for an initial payment and a continuous royalty payment. He is an entrepreneur who intends to create a successful business relationship.

Franchisee– The ‘Franchisee’ is the person who uses the Trade mark and business model of the Franchisor or licensed from the Franchisor. He is a person who intend to expand business model of Franchisor into a regional or national market.

Role of Franchisor and Franchisee

1. Franchisor– The Franchisor is responsible for following:

• A proven business model– Franchisor plays an important role in letting consumers recognize its brand and product by reaching at point where its business model works efficiently.
• A recognized Trade mark– A Franchisor has acquired the most valuable asset known as Registered Trademark through careful research and a method of hit and trial. It requires a great deal of time and dedication for acquiring such Trademark and creates a Brand Value of its product in the economy.
• Established business system– By working for customers and with clients to deliver best product and services, the Franchisor creates a well-established business model that Franchisee will also follow. The Franchisor has developed a well-versed system of pursuing business that produces sound results to an organization.
• Training and support– It is the most important contribution that a Franchisor can provide to the Franchisees and its team. Training and on-going support from a franchisor proves to be irrefutable success to its Franchisees. Franchisor can better advise on running the business whenever required by Franchisee.

2. Franchisee– If a Franchisee runs a business successfully, then it will help the entire brand. As a Franchisee, it has various responsibilities such as:

• Paying Franchise fees and Royalty– In order to use Intellectual property of the Franchisor, the Franchisees are required to pay a License fees and royalty.
• Build out location for Franchise– Most franchisees help extensively with finding, leasing and building out location for the franchise.
• Hiring and Training employees– Although Franchisors offers training to the employees but Franchisees are also responsible for making sure that employees are trained properly.
• Maintain standards while running business– There are certain expectations of the Franchisor from the Franchisee related to the standards maintained while running the business. Hence, Franchisee is responsible for maintaining such standards.

Key Laws Governing Franchising in India

• The Indian Contract Act, 1872: This Act is the mother law governing the fundamental aspects of the agreement between the franchisor and the franchisee. The Indian Contract Act decides the fundamental principles such as offer and acceptance, consideration, breach of contract and other related activities.
• The Competition Act, 2002: This Act prohibits arrangements related to production, supply, distribution, acquisition or control of goods that cause or are likely to cause an adverse effect on the competition within the country. The Competition Act was launched in India to restrict big franchise from creating a monopoly in the market.
• Consumer Protection Act, 1996: This Act promotes the idea of consumer and consumer interest. Under this Act, the consumer can file a complaint against both the franchisee as well as the franchisor, if there is any defect in the product or deficiency in services. Consumer Protection Act safeguards consumers against unfair trade practices.
• The Foreign Exchange Management Act, 1999: This Act comes into play when there is the involvement of foreign currency or assets. All international brands like Reebok, KFC, Nike having their franchise in India are all controlled by this Act. It also controls the payment in foreign currency. The Indian government is working towards simplification of laws so that international brands can open up their franchises in India without much of a hassle.

How Franchisee agreements are drafted?

The Franchisee agreements shall have the following components which are well-written and understood by both the parties:

• Complete Details of Franchisor and Franchisee– The details of both the parties needs to be clearly mentioned before entering into the agreement. For the agreement to be legally enforceable, all the minute details such as name, contact details, etc. needs to be mentioned.
• Purpose of Franchise– The reason behind such franchise must be clearly mentioned in such agreement. It is a very essential component of an agreement as it helps the parties agree on common ground.
• Location– This component defines the territorial limits where franchisees can enjoy the intellectual property of the franchisor. The franchisees select the suitable site for such operation and also obtain required aprooval of the franchisor before signing such aggreement.
• Terms and Conditions– All the terms and conditions regarding the use of such intellectual property by the franchisees must be clearly specified. Such specifications are necessery to let franchisee know how to use such property with the consent of franchisor.
• Obligations of both Franchisor and Franchisee– The Franchisor and Franchisees needs to obey certain obligations and they have to fulfill certain duties and provides support to each other.
• Consideration– The details regarding the upfront fees, ongoing royalty that the franchisee needs to pay and also mode and time of payment by each party shall be decided in advance to avoid any confusion.
• Termination of Agreement– This component helps both the parties to get an option of termination, grounds for termination and consequences for the same. The renewal clause can also be inserted in such component.
• Indemnification clause– This is an essential component of an agreement as it elaborates provisions regarding who and when will they indemnify.
• Validity of Franchise agreement– This component mentions about length of time such franchise agreement shall remain in force.
• Training support– The details regarding all the trainings which needs to be provided by the franchisor to the franchisee is mentioned in such clause.
• Governing laws– The laws that will govern such agreements and under such territorial jurisdiction agreement falls under is mentioned in such clause.
• Advertising strategies– To promote all the services related to intellectual property, both the parties shall make some advertising strategies.
• Exit strategies– There is no such standards for exit strategy. It is all based on the discretion of both the parties.

Advantages of Franchising agreements

There are several benefits of Franchising agreements such as:

Summing up

An individual or entity who wants to commence its business with less risk and with greator security can pursue their business as a Franchisee. Although Franchisees own their business but they have to work in accordance with the guidelines provided by the franchisor. Franchising is seen by some as simple while some seen as cumbersome and difficult. It is also considered as the most dynamic ways of doing business. Most well known companies that have become popular through franchising are Coca-Cola, McDonald’s, Nike, etc.