What Is a Franchise Agreement? – an Overview
Franchising is the practice where the business owner of an enterprise or company (franchisor) consents to another individual (franchisee) carrying out their own business under the title/brand name of the franchisor. In such a relationship, the franchisor offers their tools of business, technical know-how, intellectual property, and training to the franchisee. The franchisee applies the above and aims to profit both the franchisor and the franchisee. It is a profitable business model that allows domestic business persons to carry out successful foreign businesses within their country.
However, franchising is not an easy task as it requires a great deal of planning, negotiation, drafting, and agreements between the franchisor and the franchisee. The mutually understood terms that both parties reach leads to the formation of a franchise agreement. A franchise agreement is one legal document that is mutually agreed upon by the franchisor and the franchisee. It binds both of them into carrying out legal obligations for each other. An ideal franchise agreement includes various terms such as remuneration, timeline, conditions for usage of brand name, etc. Hence, it is important to be thorough with your franchise agreement so that the benefits out of such relationships are balanced.
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Benefits of a Franchise Agreement
- As franchise agreements are valid legal documents, it binds the franchisor and the franchisee in a relationship where both have to adhere to specific provisions
- As both the franchisor and the franchisee get monetary and other benefits out of the relationship, there is little chance of dispute or breach of agreements
- The terms and provisions in the franchise agreement are mutually decided, this results in a healthy business relationship between both of them
- A franchise agreement permits the franchisor to define guidelines for the maintenance of quality related to different facets of the trade before onboarding the franchisee and binding them in a franchise contract
- With a franchise agreement format in place, the franchisor can set how the franchisee adopts the business and branding
- The penalties for mismanagement or violation of the business branding are defined in the agreement to protect the brand name at all times.
What Should a Franchise Agreement Include?
An ideal franchise agreement should include the following clauses:
Details of the Franchisor and the Franchisee
The detailed relationship of both the members is included in this clause. It is the first detail included in the franchise agreement draft.
Timeline and Validity
This is the duration of the relationship between the franchisee and the franchisor. It is that period where the franchisee is allowed to see under the name and the mark of the franchisor. This duration can be extended if both have the agreement of the same.
Monetary Details to Be Included
- Franchise Fee – This is the amount the franchisee has to pay to obtain the trademark and business name of the franchisor.
- Royalty – This is a fixed percentage that the franchisee has to pay to the franchisor on a monthly basis.
The amount and mode of payment for either is as per the discussions between the franchisee and the franchisor.
It is the location or territory within which the franchisee is allowed to operate the business. The burden of finding the location is on the franchisee. This location is subject to the approval of the franchisor.
This includes details as to how the franchisor expects the franchisee to run their business. Some of the areas they cover here will include:
- The operation of the franchisee unit, as per the operating standards set by the franchisor.
- The goods and/or services the franchisee is allowed to offer.
- The goods and/or services the franchisee needs to purchase exclusively from the franchisor.
This section of the agreement gives the franchisee the responsibility to market, advertise and other promotional activities.
It includes the use of the trademarks and intellectual property that the franchisor owns that the franchisee is allowed to use for the business operations.
The franchisor is responsible to provide required support and supervision to the franchisee. It is done to make sure that uniformity is maintained among all franchised businesses.
It includes the terms that mention detailed provisions related to the termination of the franchise agreement. It is related to those where either party fails to perform as per the terms mentioned in the agreement. It also mentions penalties in the event of a franchise agreement is terminated.