Understanding the Elements of Franchise Agreement
The increasing trend of subletting the business or expanding the business to gain more market has given rise to a franchise system wherein the business (franchisor) licenses the knowledge, know-how, and the associated function to the third party (franchisee) interested in taking and moving forward with the business. For this, an agreement is generally being made between the parties which are known as a Franchise agreement. This is a legally binding document that altogether explains the work, functions, and operation that will be expected by the franchisee in their work. This document depends upon the working and the nature of the business since nature will define the terms and conditions and the method of the operations in the business and hence there cannot be any standard form of a franchise agreement. This agreement is an important part since this will ensure the smooth running of the business and hence should be drafted with the utmost care and it is highly recommended to take the help of an experienced attorney before ratifying it.
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Understanding the Franchise Agreement
The business that will be done by the franchisee is directly or indirectly will be associated with the franchisor’s business and that is why they will share the common brand of the franchisor. Therefore, the control over the conduct of the business will be in the hand of the franchisor. The level of control being exercised by the franchisor will depend on the agreement between the two. Mostly, the control over the standards and brand management and customer relations are generally handled by the franchisor. Undoubtedly, the franchise will come up with a cost. This cost will be dependent upon the ambit of business being covered and sharing the profit or seeking royalty. This payment will ensure the franchisor’s dominance over the agreement. The agreement also needs to be flexible enough to allow the franchisor to make contractual modifications that reflect decisions in response to franchisees’ specific needs. However, there are no changes to the stipulation that franchisees must manage their independently-owned businesses daily in accordance with brand standards.
Elements of the agreement
A lot of nuances must be kept very clear while drafting the franchise agreement. The first thing that the agreement must make clear is with regards to the relationship with the parties and the obligation thereof. This part will provide an overview of the agreement. The agreement will decide the fees and other royalties that will be decided with due consensus among the parties. The fees that have to be paid will be dependent upon the business structure and how much business is being given to the franchisee. Mostly the franchisee will pay initial fees and then monthly or quarterly based royalties are given as per the discussion between the parties. The provision of payment will even depend upon the conduct of the business. Meaning thereby, who will incur the expenditure for branding or logistics. Franchisors are cautious concerning brand management and the standards they put in the market. Therefore, such types of quality checks will be given the utmost priority by the franchisor. For example, if there is a hotel and it has given a franchisee to a third party, it is highly probable that the franchisor will ensure an effective quality check of food being given and will ensure that that the raw materials needed must be provided by the franchisor itself. Not even with the quality, but also, the franchisor will ensure the site development as per the standards maintained by it. The location and the ambiance are an important part for the consumer, to notice the business of the franchisor.
The agreement will involve the length of the relationship. The length determines the duration in which the parties will be in the contractual relationship. This duration is important because it helps the parties to access themselves within the stipulated time and the decision they make thereof. The marking of the territory is very important. This ensures that only the franchisee will have the right over the territory and no one else can get the same license thereby, affecting the business. Franchisors also need to deal with the reservation of their rights within a franchisee’s territory, including alternative distribution sites and sales over the internet. Selling over the internet is now the trend and maintaining an effective jurisdiction becomes a difficult task.
The agreement must entail various other provisions which might become a matter of dispute in the future. For example, the use of Intellectual property holds an important part of the relationship and it must be made very clear. What will be the term of licensing the IP and to what extent the IP must be used, should be made very clear. How the management of expenditure with regards to the advertisement will be decided, must be mentioned in the agreement. Due to its complex nature, it is highly advised that the agreement must be drafted or must be ratified after taking effective consultation with experienced professionals and attorneys. IPLF with its team of experienced professionals has drafted thousands of franchise agreements with utmost care.
Author: Saransh Chaturvedi (an advocate) currently pursuing LLM from Rajiv Gandhi School of Intellectual Property Law (IIT Kharagpur). In case of any queries please contact/write back to us at support@ipandlegalfilings.com.
