Read on to learn about the elements of a franchise agreement, the types of franchise agreements, and various points that need to be looked at carefully before entering into a franchising agreement
An agreement drawn out between a Franchisee and a Franchisor which is legally binding on both the parties is referred to as a Franchise Agreement. A franchise Agreement is an agreement between parties where the franchisor (a business with goodwill that is well established) agrees to make available all sorts of support to the franchisee, such as its brand and model of operation. The franchisee is now allowed to conduct business similar to the Franchisor by paying a specific amount to the Franchisor. The franchisor allows the franchisee to run a similar business in exchange for a share of the income and or fee. Now lets discuss the details about the Components of a franchise Agreement.
Components of a Franchise Agreement
A franchise agreement contains the roles and responsibilities of the signing parties. Prior to signing the agreement, it is important to check out the Franchise Disclosure Document (FDD) since it carries even the smallest detail attached to the agreement.
Some of the information it contains are:
- Expectations from the settlement
- Names of the franchisee and the franchisor
- The type of franchise being sold
- Information about the franchisor’s past execution of the project
- Region for the franchise
- Strategies for promotion, and
- Help the franchisee may require to make the business grow.
The Franchise Agreement will contain information such as commitments of the franchisee, underlying expenses of litigation, and claims on income. With a franchise agreement the franchisee can access the Franchisor’s logo, trademark, products, and marketing expertise.
Franchise Agreement Types
There are three basic types of franchise agreements that are drawn up:
Single Unit Franchise Agreement
The most common type of franchise agreement that has been traditionally used. It specifies the obligations and rights pertaining to the establishment of the franchise and the operations of the franchise. In this case, it is for the franchisee to invest its own capital into the business and use its own skills and publicity/ advertising, goodwill, etc., to develop and grow its franchise.
Multi-Unit Franchise Agreement
The franchisor is allowed to give several franchised units to the franchisee. This means that the agreement allows the establishment and operation of more than a single franchise unit. A multi-unit franchise needs to come with smart financial capability since this will be a key asset for the business’s growth. You can see the example of the KFC Franchise and the Bata Franchise.
Master Franchise Agreement
The franchisor gives the right within a continent, region, or country to a franchise that becomes the master franchise. This provides the master franchisee with the opportunity to provide the complete range of services and products that the franchisor has on offer.
Furthermore, the master franchisee is also given the right to further recruit franchisees. This makes the master franchisee also a franchisor. It becomes easy to make Franchise Agreement Format Online So that You Can have complete Idea over it.
Elements of a Franchise Agreement
A franchise agreement covers all the terms and conditions that are binding on the Franchiser and the franchisee. The contents of the agreement carry various elements.
1. Relationship’s Outline
The franchise agreement documents contain the names of the parties entering into the agreement and the intellectual property’s ownership. It stresses the franchisee’s obligations to manage their business to match the franchisor’s specified standards.
2. Franchise Agreement’s Duration
The agreement provides information regarding the course of the relationship between the franchisee and the franchisor. The franchisee is required to give an initial amount to become part of the relationship legally. After this, the franchisee needs to pay a fee at specified intervals to remain legally attached.
3. Territory and Location
The franchisee’s territory and location for setting up the business as allocated by the franchisor are specified. While for each franchisee, the location will be different, there are two types of territories:
- Non-exclusive – In this type of territory, the franchisor can sell several franchises within the territory
- Exclusive – In this type of territory, the franchise runs an exclusive business, and no other franchisee of the same franchisor can be opened there.
4. Using Intellectual Property
The agreement specifies the manuals, patents, trademarks, etc., that the franchisee is offered and those that it can use.
5. Advertising
The terms of advertising are clearly laid out. It details such information as to whether the cost will be borne by the franchisor/ franchisee or if it will be shared. What will be the manner of advertising, its frequency, various forms of publicity, and such details are clearly specified.
6. Insurance
A franchise agreement normally requires that franchisees get insurance to cover their business’s functions.
7. Training
The training, seminars, functions, meetings, etc. that are conducted by the franchisor and need to be attended by the franchisee are clearly detailed.
Points to Check Before Signing the Franchise Agreement
It is essential to carefully look at the franchise Agreement, check every point and ensure that it is exactly as agreed upon. You need to ensure that there is no catch, loophole, or fine print that will lead to differences later. Some of the items in the agreement that must be looked at carefully are given below.
1. Domain Guidelines
The franchisor allocates specific regions where the franchisee can work jointly.
2. Charges to be Paid to the Franchisor
The charges that the franchisee needs to pay to the franchisor include franchise fee expenses and accumulated investment. It also specifies when these charges need to be paid.
3. Services the Franchisor Offers
There are various services that the franchisor will offer to the franchisee, some of which the franchisee has to accept. These comprise training needed to run the franchise, promoting duties, and various services and products that the franchise will provide to the customers.
4. Agreement Renewal
The duration of the current agreement and the terms and conditions for further renewal or otherwise on expiry of the current agreement are clearly specified and must be carefully studied and understood.
5. Promotion and Publicity
Generally, it is for the franchisor to provide all publicity related content, its appearance, and the recurrence of the publicizing that the franchisee must implement.
6. Transfer of Rights
Generally, the franchisor maintains all the authority required for endorsing the terms of any transfer or exchange. Similarly, the franchisor determines that the privilege of the first refusal rests with the franchisor when a franchise is put out for purchase. The franchisor has the first right to purchase back the franchise.
Conclusion:
A franchise agreement details the legal and professional conditions and terms agreed upon by the Franchiser and the franchisee that will be in effect for the duration of the agreement. A franchise agreement ensures that the relations between the two parties remain cordial if the agreement is followed. In the current times, the franchise industry in India is growing at a vigorous rate and many agreements are being signed that are mutually beneficial. If you have any queries reach out to Vakilsearch.
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