Franchise Agreement

A Franchise Agreement, sometimes also called a business franchise agreement, is a document between two main parties, the party that has already developed their business model, called the franchisor, and the party that agrees to certain terms and conditions to create their own franchise business based on that business model.

In the franchise agreement, the franchisee sets out the franchisee's expectations and requirements for operating the business under their brand name. It can be any type of business and is often run as a franchise of restaurants or small retail shops.

In these agreements, the franchisor and franchisee outline their expectations for each behavior and agree on the boundaries of their relationship. Primarily, it is the franchisor that describes the rules that the franchisee must follow, but parts of the agreement also deal with the protection of the franchisee.

A franchise agreement helps the parties define the most important details of their relationship like the franchisor's business description, quality control standards, and, of course, fee information for the franchisee.

A good franchise agreement will cover both parties in case anything goes wrong: things like dispute resolution and governing law are also covered.

Benefits of a Business Franchise Agreement

The following are some benefits of the business franchise agreement;

• Since the franchise agreement is a valid legal document, it binds the franchisor and the franchisee in a relationship where both have to comply with certain provisions.
• Since both franchisor and franchisee receive financial and other benefits from the relationship, there is less chance of disputes or breach of contract.
• The terms and provisions of the franchise agreement are mutually determined, resulting in a healthy business relationship between the two
• A franchise agreement allows the franchisee to define guidelines for maintaining quality related to various aspects of the business before onboarding and committing to the franchise agreement.
• With the format of the franchise agreement, the franchisor can set how the franchisee will accept the business and branding.
• Penalties for mismanaging or violating business branding are always defined in the contract to protect the brand name.

Business Franchise Agreement Includes Some Clauses

Most franchise agreement includes the following clauses;

• Franchisor and Franchisee Details

The detailed relationship between both members is covered in this section. This is the first detail included in the draft franchise agreement.

• Timeline and Validity

This is the term of the relationship between the franchisee and the franchisor. This is the period where the franchisee is allowed to operate under the franchisor's name and logo. This period can be extended if there is a mutual agreement between the two.

• Financial Details must be Included

1. Franchise Fee

This is the amount the franchisee has to pay to acquire the franchisee's trademark and business name..

2.Royalty

This is a fixed percentage that the franchisee has to pay to the franchisor every month. The amount and mode of payment for either are subject to negotiation between the franchisee and the franchisor.

• Site Selection

This is the location or territory in which the franchisee is allowed to operate the business. The onus is on the franchisee to find the location. This location is subject to franchisor approval.

• Business Conduct

This includes details of how the franchisor expects the franchisee to operate their business. Some areas here will include;

1. Operation of the franchise unit, according to operating standards set by the franchisor.
2. Goods and/or services offered by the franchisee.
3. Goods and/or services that require the franchisee to purchase only from the franchisor.

• Advertising

This section of the agreement places the franchisee in charge of marketing, advertising, and other promotional activities..

• Intellectual Property

It includes the use of trademarks and intellectual property owned by the franchisor that the franchisee is permitted to use for business operations.

• Training

The franchisor is responsible for providing the necessary support and supervision to the franchisee. This is done to ensure that uniformity is maintained across all franchised businesses.

• Termination Clause

It includes the terms and conditions that mention the detailed provisions related to the termination of the franchise agreement. It deals with people where either party fails to perform as per the terms stipulated in the contract. It also mentions the penalty in case of termination of the franchise agreement.

4 Types of Franchise Agreements

TFollowing are the four types of the franchise agreement;.

• Single Unit Franchise Agreement

A franchisee is contractually granted the right to open and operate a single franchise unit under a single-unit agreement. This is the most basic and often used form of contract. These franchise agreements are especially attractive to new franchisors because they provide an easy method to engage in the franchising process. If the franchise is successful over time, the franchisor may consider extending the agreement to cover more units.

• Multi-Unit Franchise Agreement

A multi-unit agreement is an agreement that allows a franchisee to open and operate multiple franchise locations. A multi-unit setup is not limited to a specific geographical area. Franchises may have locations in different parts of the city. In other cases, these franchise agreements include terms that require the franchisee to follow a set of guidelines to build a certain number of units. The franchisor may have the right to engage with other interested parties if the franchisee fails to deliver within the agreed time frame.

• Area Development Franchise Agreement

A franchisee who is an area developer has the right to open multiple units simultaneously in a particular region. In contrast to a multi-unit agreement, the franchisor grants the franchisee exclusive rights to develop that territory in an area development agreement. For example, a franchisee may contract to open 5 units in a specific region over five years. The franchisee has exclusive rights to that territory and cannot open other units there during the contract period.

• Master Franchise Agreement

A Master Franchise Agreement has more rights than an Area Development Agreement. A master franchisee, in addition to having the right and responsibility to open and operate a certain number of units in a defined territory, also can sell sub-franchises to other persons in the territory. It is similar to being a franchisor, but only in a limited geographic area.

Use of the Document

Following are the uses of documents of the franchise agreement;

• This document can be used by a franchisor to establish a business relationship with a new franchisee or a document a franchisee is looking to present to a potential franchisor for a contract.
• This document shall include relevant identifying details, such as the parties as individuals or businesses, and their respective addresses and contact information. Information on the most important features of the agreement between the parties will also be included, such as the duration of the agreement, fee information, and how the franchisor's branded marks and copyrights are to be handled.
• The parties will be able to choose many details as to how the agreement should be structured, including what, if any, responsibilities the franchisee has. This franchise agreement is a strong document that will help ensure that the relationship between the franchisor and the franchisee flows smoothly.
• A franchise agreement is legally binding when it is printed on non-judicial stamp paper or e-stamp paper and is signed and dated by both the franchisor and the franchisee. The value of stamp paper depends on the state in which it is issued
• Each state in India has provisions regarding the amount of stamp duty payable on such contracts. Information regarding the stamp duty payable can be found on the state government website. For example, the Karnataka state website provides details of stamp duty payable on contracts as does the Delhi website.
• Both franchisor and the franchisee need to keep a signed copy of the franchise agreement. To do this, two different copies can be signed, or if only one copy is signed, it can be photocopied and then distributed to the parties.