DRAFT A FRANCHISE AGREEMENT

DRAFT A FRANCHISE AGREEMENT

INTRODUCTION

In this era of globalization, the businesses want to have their presence globally, while simultaneously making their names in different regions of a country.This desire of making presence in different areas bring out the importance of the Franchisee Agreement. A Franchise is a kind of license which gives franchisee the access to the goodwill, business knowledge, processes, proprietary and trademarks of the franchisor. This allows the franchisee to sell a product under the business name of the franchisor. The franchisee pays the franchisor an initial start-up fee and annual licensing fee for acquiring a franchise.

WHAT IS FRANCHISE AGREEMENT?

Before getting the access of all the privileges by a franchisee, he has to sign an agreement which is termed as “Franchise Agreement”. The franchise  agreement is a legally binding agreement between the franchisor and the franchisee. It contains all the information and the details of franchisor expectations in the methods of operation of  every facet of business from the franchisee.

There is no any standard form of franchise agreement as the terms, conditions, methods  of business operation of the franchisee and the expectations of the franchisor differs from business to business. There is a requirement of signing the franchisee agreement by both franchisor as well as franchisee.  The franchise agreement is generally a written agreement and will govern everything about the franchisee way of conducting the new business and their area of support from the franchisor.

WHAT ARE THE ADVANTAGES ASSOCIATED WITH THE FRANCHISE AGREEMENT?

The most important advantage the franchise agreement has  the right  provided to the franchisee to use the name, trademark, service marks, logos, slogans, designs, etc.

 The franchisee also has the right to use the other Intellectual Property such as operating manual and proprietary software systems. The  business of the franchisee is associated with the brand of the franchisor. Both share the common brand. This is the Franchisee Agreement which gives the right to the franchisee to use the same brand as of the franchisor.The Franchisee Agreement gives the right to the franchisor to exercise control or to provide substantial assistance to the franchisee in how to use the franchisor’s brand to conduct business. Generally, those controls cover brand standards and do not extend to the human resources of the franchisee and the area of the franchisee to manage its business, except the area of the franchisee in meeting the requirements of the brand standards.

  • This agreement protects the Intellectual Property of the franchisor and also takes care the brand reputation of the franchisor by fixing the manner of operation of the franchisee under its brand.
  • The agreement obliges the franchisor to provide training and support services to the franchisee, prior to the opening and during the entire term of the  franchise agreement.
  • The agreement also obliges the franchisor to support franchisee with marketing and advertising.
  • The agreement also makes clarity that franchisee is having a protected or exclusive territory.
  • It also consists the costs of the franchising ownership. For example, the initial franchise fee, ongoing fees, monthly royalty fee, lete fees and Interest,advertising fee and any other fee. It should also cover the required expenses and mention who would pay them.   
  • It also contains the conditions for terminating the agreement early. This gives the right to the franchisor to terminate the contract if found any malfunction in the carriage of the business by the franchisee.
  • The Franchise agreement spells out the franchise location which covers a certain area. This makes the franchisor refraining the other franchisee to not have locations within a certain number of miles.

STRUCTURE OF THE FRANCHISE AGREEMENT

The format or structure of the agreement is very important. A professional franchise agreement would include:

  • The identity of the franchiser and the franchisee
  • The fee structure
  • The duration of the franchise; or renewable rights
  • The franchisee’s rights to sell the franchise
  • The operating requirements
  • Termination of breach
  • Franchise obligations and restrictions from termination

After the basics are known, there are certain mandatory provisions to be included in the franchisee agreement. They are:

TRAINING AND ONGOING SUPPORT:

 The franchiser offers training and training programs for the franchisees and their staff. These training programs may take place at corporate offices. All ongoing technical support is also outlined in the agreement.

ADVERTISING AND MARKETING:

Just like any other fees, the advertising and marketing fees should also be well balanced as per the needs of the franchiser. Franchisers who create innovative advertising campaigns across all platforms realize the best return on investment (ROI). The marketing strategies should be designed as per the commitments made by the franchiser.

INSURANCE REQUIREMENTS:

 Franchise agreements define the minimum insurance a franchisee is required to have prior to opening and during the term of the agreement. For franchise systems, establishing satisfactory insurance standards at the outset is particularly important in order to determine appropriate coverage for the franchiser and set minimum requirements for franchisees.

ASSIGNED TERRITORY:

Every franchise agreement does not grant an exclusive or protected territory, but specifics about the territory must be mentioned. It has to designate a territory for the operations to be held. Along with it, the franchisers also need to deal with the reservation of their rights within the territory, including online sales and distribution.

The main objective of a franchise agreement is to promote the goods and services of the franchiser through the franchisee. The products that are promoted follow strict operational standards, for example- restaurants, automobile dealerships and other business services. Different businesses require different kinds of franchise agreements. Hence it is always better to know about all the options available.

 The different kinds of franchise agreements are:

CHARACTER MERCHANDISING AGREEMENT:

Under this agreement, the name of any famous personality or fictional character is licensed to be used for a particular product’s marketing. The main aim of these agreements is to protect the copyrights and reputation of the associated personalities or characters.

INVENTION LICENSING AGREEMENT:

As the name suggests, this agreement is used by a person to patent or license any invention done by him. It is used to prevent exploitation of the invention and to create rights of the person over it. Such an agreement focuses on the licensing of patent and design rights and the manufacturing and marketing of the invention with limited risks. These agreements are extremely important to prevent any sort of duplicacy in the market.

MARKETING ARRANGEMENTS:

 This is the most common franchise agreement where the distributor usually adopts a particular format of the franchiser. These are generally used in cases of automobile companies and food chains. Here the company signs an agreement with a distributor to market his products. The distributor acts on behalf of the company by promoting and selling his products and is paid remunerations for the same.

TRADEMARK LICENSING AGREEMENT:

Under this agreement, the owner grants a license to another person to use the trademark on his goods. These agreements can be used for sales of goods, promoting or to preserve the standard quality of goods, goodwill and reputation of the brand. The most advantageous utilization of these agreements is for territorial expansions. The trademark license can be granted to distributors in different parts of the world to expand the business. This also opens various channels for the promotion of the products and services offered by the company.

though franchising can be a very profitable business arrangement for the franchiser and the franchisee, if not entered into properly or looked after well, it could prove quite the contrary. Both the parties should thoroughly read and scrutinize the agreement before signing it. Investors and businessmen should treat the franchise agreement like the holy grail and must go through it several times with a fine-tooth comb to make it an enormous success.

LENGTH OF THE FRANCHISE AGREEMENT

The duration of the franchise agreement is generally 10 or 20 years. This agreement is basically a long time agreement for business to continue and flourish in the area. The motto is to make the contract to last long to recoup the investments.

According to Goldman, “Franchise agreements are generally entered into for

multiple years.They typically last between 5 and 25 years, with 10 years being the

average length of the franchise agreement”.

CONDITIONS OF THE FRANCHISE AGREEMENT

There are three important conditions of the franchise agreement:-

Advertising / Marketing :-

The franchisor through the agreement will make it clear that what would be his advertising commitment.what fees he would take from the franchisees to pay towards these costs of  advertising or marketing.

Renewal rights / Termination / Cancellation policies:-

The agreement should have the clarity on the termination or renewal conditions of the agreement.The franchise agreement is a contract which is meant to save the interests of not only the franchisor but also of the franchisee and it came as a boon for both of them to carry the business ahead and make the reputation of it widely acceptable in the different areas. This also reduced the hurdles and peculiarities associated with it.