What are the Components and Legalities of the Franchise Agreement?
Franchising as a concept fosters many types of partnerships through various structures. Certain rights and advantages are granted to franchisees for which the franchisee is solely responsible, while others are reserved for the franchisor. But what is it that both the franchisee and the franchisor are guided by? What are their rights, and what are the norms and regulations that both of them must follow?
What is a franchise agreement?
A franchise agreement is a legally binding contract that spells out the terms and conditions under which the franchisor will work with the franchisee. The franchisor’s and franchisee’s responsibilities are also outlined in the franchise agreement. The person who joins the franchise system signs the franchise agreement.
The approved relationship between the franchisee and the corporate entity is governed by a franchise contract, which includes appropriate provisions for future actions if the connection needs to be ended.
Here are the basic elements of a franchise agreement for those who are unsure what they are signing.
Elements of Franchise Agreement
1. Duration of the Agreement
The tenure of the franchisor-franchisee relationship is the length of the connection. Franchisors typically provide franchise opportunities for five to ten years. One of the most crucial components of the agreement is the duration of the connection. It can also be extended if the relationship is still going well and they both want to continue working together.
2. Franchise Fee & Consideration
In a separate section, the terms of the franchise fee, deposit, royalties, advertising costs, and other charges are detailed in-depth. The form of payment and due dates for the franchise fee, as well as other issues, are covered in detail. Prior to signing the agreement, double-check that the terms of the franchisee fee contained in the agreement are in accordance with the franchisor and franchisee’s understanding.
3. Business Operations
Another item that must be clearly stated in a franchise agreement is the franchisee’s company operations. One of the most significant benefits of owning a franchise is that you can benefit from the franchisor’s knowledge and expertise. As a result, it’s critical to include all relevant details concerning the franchisor’s level of support as well as the franchisee’s additional duties. This covers things like purchasing goods or services, adhering to the franchisor’s operating requirements, and account administration, among other things.
4. Site Selection
Finding the ideal location for the franchise unit is one of the franchisee’s most important obligations. Typically, the franchisee chooses his or her ideal location and waits for the franchisor’s approval before opening the unit. In addition, every detail regarding the site must be written down in the franchise agreement in order for it to become an official franchise unit of the brand.
5. Training & Support
The majority of franchisors provide franchisees with training and assistance. These trainings are typically conducted at the company’s headquarters before opening and on an ongoing basis on numerous topics such as supply chain, quality control, and other management-related questions. The franchise agreement specifies the training length and scheduling.
6. Transfer or Assignment of FranchiseDescription
The majority of franchise agreements expressly state that the franchisee must acquire the franchisor’s consent before transferring or assigning an interest in the franchise unit. Furthermore, there may be stipulations granting the franchisor the right of first refusal to take over the franchise if the franchisor wants to sell it.
7. Termination of Franchise Agreement
In the event that any party in the agreement fails to perform as agreed, the franchise agreement has comprehensive measures for terminating the agreement. Furthermore, the termination clause must include penalties or fines for early termination, as well as the parties’ duties following the termination of the franchise agreement.
8. Governing Law and Dispute Resolution
It is standard practice to state the applicable laws and jurisdiction for the franchise agreement’s operation. If an Indian entity and a foreign entity enter into a franchise agreement, the parties can designate the law of the foreign country as the governing law and submit to the exclusive or non-exclusive jurisdiction of a foreign court, provided that the foreign court has inherent jurisdiction over the dispute.
9. Advertising and Brand Promotion
Franchisors often invest a large amount of money in brand advertising. As a result, the franchisor’s responsibility for promotional spending for franchisees is clearly stated in the franchise agreement, as is the franchisee’s need to contribute to brand-building efforts.
10. Use of Intellectual Property
The company’s intellectual property, such as trademarks, patents, and manuals, are important assets that can be updated as the system evolves. Another significant benefit of having a franchise is the ability to utilize some of the brand’s intellectual rights (as directed by the franchisor). The franchise agreement specifies what is licensed to the franchisee, how the franchisee can use the brand’s intellectual property, and the franchisor’s rights to
11 Cancellation policies and renewal
This provision details the conditions for termination or cancellation of franchise and how the same can be renewed. Some franchisors also include an arbitration clause. This will warrant that an arbitrator will review the case before it goes to court in the case of any legal event.
12 Exit Strategies
There is no standard exit strategy, some franchisors leave it to the discretion of the franchisee, while some insert a clause for the buyback. This will give the franchise an option to buy at a determined rate or match the buyer’s offer.