In this blog, you will learn about the different key elements of franchise agreement. It will help you understand the knick-knacks of a franchise contract better.
A Franchise Agreement is a binding and legal contract that grants the right to the franchisee to take control of a company or sell and distribute the services or goods sold under the franchisor’s trademark.
The franchise agreement can be described as a legal document or contract between a franchisee and a franchisor to start and manage a franchise unit. If the franchisee wants to have more units, different agreements are made. Read this article to understand the essential key elements of a franchise agreement.
Franchise Agreement – What is It?
A franchisee and a franchisor enter into a agreement. They usually mention franchise disclosure documents (FDDs) governed by the Federal Trade Commission or the FTC’s franchise rules. A franchise agreement also mentions the obligations and rights of the franchisee and franchisor to sell and license a company’s licensing rights and intellectual property. The scope of the franchise, including territory, product line, and branding, is a key element of franchise agreement.
If you wish to license your business to use it as a franchise, you must ensure that the agreement is operating legally and properly. It could lead to certain pitfalls and hiccups in your franchise agreement that you will regret later. You must ensure that you have an appropriate agreement that suits your particular situation and understand how it works thoroughly.
Elements of Franchise Agreement
Most agreements have common elements. It doesn’t depend on the type of franchise agreement you use. However, there are certain critical differences if you are looking for a highly specialised agreement. You should always opt for a customised franchise agreement since it would suit you better. You must carefully go through the elements of the agreement as they are crucial in setting the tone and making the foundation for the agreement and relationship with the franchisee. Ensure that all the franchise agreement elements are present in your document as it’s necessary.
Franchisor and Franchisee Details
Before making a franchise agreement, the correct details of the franchisee and the franchisor are noted. Mostly, a agreement is entered into by two legal entities or companies. The officer or director appointed by the Board Resolution is responsible for signing in place of the franchisee and the franchisor.
Franchise Fee
The specific terms outlined in the franchise agreement for royalties, franchise fee, deposit, fee for advertising, etc., are written in another section. Even the due date for payment of the franchise fee and the particular mode of payment are discussed in another section. It is crucial to understand and follow the terms of the franchise fee as written in the franchise agreement as decided by the franchisee and the franchisor before they sign the document.
Here you can check KFC Franchise Cost and Bata Franchise Cost for these two franchises for your reference.
Business Operations
The major benefit of having a franchise is that the franchisor can help the franchisee manage the particular franchise unit since they have years of experience and expertise. This is why all franchise agreement must have a detailed list of information about the level of help offered by the franchisor and the list of responsibilities of the franchisee. Some of the most important points written in the agreement about the franchise operations are:
- The specifications state that the franchisee will only purchase services or products from the franchisor if there is any such need;
- The need to manage accounts and other specified details according to the franchise agreement;
- The particular details of services and goods that the franchise can provide
- The need to manage and execute the franchise unit according to the standards set by the franchisor;
- The requirement of the franchisor to follow the relevant laws and manage the franchise unit with the appropriate license and business registrations: https://www.mca.gov.in/MinistryV2/incorporation_company.html
Training, Supervision, and Support
For a particular amount of time or even daily, franchisors need to offer all their franchise units the proper training, support, and supervision. The franchisor’s responsibilities toward the franchisee for training, supervision, and support are spelt out in the franchise agreement. The agreement also mentions in great detail the support provided by the franchisor for the daily operation of such activities.
-
Transfer or Assignment
Many franchise agreement specifically require the franchisee to have the express approval of the franchisor to commence any transport or assignment of interest in the particular franchise unit. Furthermore, there can also be additional details stipulating the franchisor with the particular rights of the first refusal to take concerning the franchise in case the franchisor wishes to transfer their ownership.
-
Governing Laws and Dispute Resolution
It is considered good practice to also write about the governing laws and jurisdictions for the management of the franchise agreement. If the is between a foreign entity and an Indian entity, both the parties to the particular agreement can designate the law of the foreign country as the governing law and grant the non-exclusive or exclusive jurisdiction of the foreign country’s courts, given that the foreign country’s courts have any dispute over the dispute.
However, it is in the best interest of everyone to agree on different dispute resolution mechanisms such as conciliation, arbitration, and mediation if there is a dispute to ensure a cost-effective and speedy resolution dispute.
-
Use of Trademarks and Intellectual Property
This is one of the essential elements of a franchise agreement. You must ensure that the franchisor has a registered trademark and that they possess exclusive rights to the trademark. The franchisor must also mention the particular marks and symbols or words that the trademark has been applied to or registered for.
Many agreements have certain points that ask the franchisee to notify the franchisor if there is any trademark infringement or to avoid causing any damage to the trademark during usage. Lastly, the franchise agreement should mention the ownership of the trademark with particular provisions that prohibit its usage after the termination of the agreement.
-
Agreement Term
The franchise agreement must also state the particular terms of the agreement, the provision for renewal, the effect of termination, and the length of the agreement.
Conclusion
A franchise agreement is a binding document essential for both the franchisee and the franchisor. Before entering into a agreement, you must understand the various common elements present. A clear definition of rights and responsibilities is one of the key elements of franchise agreement. You can use all these elements and customise them according to your needs. You must be informed of the various elements you can use in your franchise agreement.
