What is franchise agreement?

Franchising a business allows an opportunity to individual/ corporates to start a business by legally using another individual/ corporates business under the same name, trademark and goodwill.

Franchises extends to no. of industries including automotive, medical, coffee stores, supermarkets, hotels, etc

Some of the successful franchises around the world which has largely expanded its business are

• McDonald's,
• KFC,
• Burger King,
• Pizza hut,
• Baskin Robins,
• Subway etc

Before starting franchises, its imperative to enter into the legal contract between the parties. Below, article encompasses the concept about the Franchise agreement.

What is a Franchise Agreement?

Franchise Agreement is an agreement between a franchisor and franchisee whereby the franchisor allows the franchisee to use the premises for the purpose of carrying business in return of remuneration.

Basic features of entering into Franchise Agreement

1. The agreement between franchisor and franchisee offers the right to franchisee for operating the business under the same trademark, goodwill and benefits
2. The license to operate is in the hands of franchisor though right to use is transferred
3. Investment for expansion of business and outlets after the execution of agreement is done by franchisee
4. Franchising helps in expanding the business operations in wide areas
5. Franchise is the independent business. It operates on its own.

Clauses of Franchise Agreement

Some of the basic provisions covered under Franchise Agreement. Though the terms of this agreement varies from industry to industry.

1. The agreement should always set out the rights granted by Franchisor for using his trademark and operating system for the certain period as defined under the agreement;
2. The agreement should provide the territory in which the business will be operated ;
3. The agreement should provide the term of this agreement upto which the franchisee can operate the business of franchisor as per the terms of this agreement;
4. Agreement should also provide the amount of the fees or initial payment to be paid by franchisee for starting the franchise

This section is divided into 3 categories:

i. Upfront lumpsum fee:

Initial payment made by franchisee for starting the franchise. This fee includes the cost of setting up the outlet, legal costs, training of franchisee costs

ii. Ongoing fee:

This payment is regular which is paid either monthly, quarterly or annually depending on the turnover of the business

iii. Fixed payment for promotion:

Fixed percentage of turnover is regularly made for the advertisement and promotion purpose of franchise

1. Most franchisors provide the training to the Individual to develop their skills. So if the franchisors are spending some extra costs on training it should be provided in the agreement;
2. Agreement should always mention the protocol for manner of operating the outlet;
3. Agreement should provide the conditions under which the Franchisee is entitled to terminate the agreement. Also with respect to the ‘post termination clause’ restriction of carrying the same business for competition purpose should be there in the agreement;
4. The agreement should set out criteria that what is required for renewing the term of the agreement like timely written notice of an intention to renew can be made by Franchisee for renewing the same;
5. Franchisor should set out the clause for preventing franchisee and penalty for non compliance for assigning the right or business to other without the franchisor’s consent and knowledge. It protects the business from being operated by the unskilled people;
6. Agreement should also contain the clause for the dispute resolution mechanism between the franchisor and franchisee.

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