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A franchise agreement is a legal agreement that is binding on the franchisor and the franchisee. The contract details the franchisor’s expectations from the franchisee, how the business must be operated, and so on. It is an agreement where the franchisor (business) consents to grant the enterprise name or company system to the franchisee (individual or entity).
There is no specific law governing the franchise agreements, but various statutory enactments are applicable. Few of them are –
This provision defines the franchisee’s territorial limits, the area the franchisee has the right to operate and outlines its exclusive rights (if necessary).
The franchisee must select a suitable place of operating the business as per the specification of the franchisor and obtain approval of the same before the signing of the agreement.
This provision outlines the franchiser’s royalty structure, a fixed percentage on the sales that the franchisee must pay for the brand name’s usage, to be paid monthly.
This provision details the length of time the franchisee will be allowed to sell under the franchise’s brand or trademark.
This provision details the upfront fees that the franchisee has to pay to obtain the trademark for the company’s brand.
The franchisor will provide training support to the franchisee to ensure uniformity in service across various franchises. This provision will provide all the details of the same.
This provision details how the business must run, the operation as per the operating standards, the goods/services the franchisee is allowed to offer, the purchases the franchisee needs to make exclusively from the franchisor, etc.
Detail of how the franchisee can use the franchisor trademark/patent, logo, or signage.
The franchisor will reveal the advertising commitment and the fees the franchisee will be required to pay.
This provision details the conditions for termination or cancellation 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.
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.
The benefits of the franchise agreement are as follows:
The agreement specifies the relationship between the franchisee and the franchisor, including both parties’ benefits and the restrictions.
The agreement ensures that the franchisor, as the business owner, has better control over the business’s operations.
The agreement provides scope for defining how the franchisee adopts the business and branding. The penalties for mismanagement or violation of business branding are defined to protect the brand’s image and reputation at all times.
Franchise agreements must be in line with the provision of the Indian Contract Act, 1872. Subject to this condition, franchises may include the disclosure requirements as a part of the contract.
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