This type of franchise agreement is legally binding for two parties that are the franchisor and the franchisee. It provides business operation details and the expectations of the two parties starting the business together.
What is a Franchise Agreement?
- The franchise agreement is made to grant permission to the franchisee to commence their startup or business in the franchisor’s brand name.
- The business should be beneficial to both parties, and the franchisor owns the legality of it as a franchisee is just a part or branch of the existing business or brand.
- This trust and official relationship are formed through the franchise documents, which are crucial to business operations.
- The franchise documents can be enforceable in a court of law if there is any breach in the terms and conditions that are specified by the franchisor.
Specific laws govern the franchise documents and their legal valuation. These are as follows:
- The Indian Contract Act of 1872.
- Trade Marks Act 1999.
- Copyright Act 1957.
- Consumer Protection Act 1986.
Critical provisions in Franchise documents.
- Location/Facility: The territory limit defined in the franchise documents sets a standard where the franchisee can begin and operate as an independent entity. This also helps in reviewing the exclusive rights it holds granted by the franchisor.
- Choosing a site and developing: The franchisee has permission to select a place for business operation, but there are some specifications provided by the franchisor. The franchisee is free to choose and show options but takes consent from the franchisor during the signing of the franchise documents.
- Authority: The franchise documents outline the pay structure which the franchisee has to pay monthly to the franchisor as their profit share. This is because the franchisee is using the franchisor’s brand name through franchise documents.
- The duration of the franchise: The provision mentioned in the franchise documents states the validity of the usage of the brand name by the franchisee.
- Fees: The franchise documents contain this provision mentioning what is the amount that is to be paid as fees to use the brand trademark.
- Training and learning Support: It is necessary to obtain unity and productive output in the franchisee branch, which will operate under its brand name. The franchise documents contain the detailed provision that training will be given to the workers at these branches for efficiency.
- Operating system: This part of the franchise document is crucial as it explains the operational objectives and methods. The way the business should run, what it can and should offer to the customers, the standards for goods/ services, and some other special instructions that a brand has given.
- Trademark usage: It is very important to know how the franchisee can use the brand name, logo, trademark, or signature. This is explicitly stated in the franchise documents for easy access and revising.
- Advertisement and publicity: The franchise agreement will contain a provision regarding the fees that are to be paid for advertising and the serious commitment the franchisee will make with the franchisor.
- Termination or renewal: This clause in the franchise documents discloses the process the franchisee can terminate and stop continuing for the franchisor. The same goes for renewal as they can take legal advice before exit or renewal to understand their position and obligations.
- Exit policies: The franchise documents may or may not contain any special instructions for exiting. There may be some additional obligations required. The buyback can be matched or can be negotiable.
Advantages of Franchise Agreement
There are various advantages attached while commencing a business through franchise documents/agreements.
These are as follows:
- It helps to define and maintain the relationship between the two parties, that is, the franchisor and the franchisee.
- It clearly states their method of operation and restrictions so that no future disputes can take place.
- It gives the option of better upgrade and control to the franchisor.
- The franchise documents give a multitude of control over the brand and the branch functionality as they can manage the business together.
- There are several penalties and damage recovery in case of a breach of the franchise documents. This makes the process easier as no misconduct can be let off, and strict operation is suspected.
- The advertising helps in the popularity of the brand that is being used in the franchise documents.
- The franchisor and franchisee receive monetary benefits because of such a business strategy.
- Protection of the brand trademark and the name is prioritized in the franchise documents.
- The regulations provide safety from misuse of any kind and shape.
Franchise Documents required for Franchise Agreement
In India, when an individual thinks of setting up a franchise outlet, they need to furnish certain documentation which will legally enable them to start up.
These franchise documents are to be revised and signed by both parties without any undue influence. The concerned authorities will be attesting to it after the parties have given their consent. This safeguards their interests and provides open definitions of roles and responsibilities.
- FDD: Franchise disclosure document or FDD is regulated by the Indian Franchise Act 2006. It is prepared by the franchisor to discuss every aspect of the business.
- Franchise agreement: This contains every little detail about the brand and business operations.
The franchise agreement is a crucial document that maintains a relationship between the franchisor and the franchisee. It is legally binding and helps in building the brand. The parties must take legal advice before signing the documents.