Consider These Following Points before Signing a Franchise Agreement
Franchising is an attractive business opportunity for entrepreneurs. However, the franchise relationship between the franchisor and franchisees is not easy to define. In the typical franchise relationship, both the parties will sign a "franchise agreement" that codifies the rights and responsibilities of each party. Franchise agreements may regulate business aspects such as advertising, signage, pricing, store design, store location, etc.
As there are no specific laws in India governing the franchising industry, it can prove to be fatal for either the franchisor or the franchisee if the agreement is not made with proper precaution. Here are the few clauses you should look forward to before signing a franchise agreement.
The central theme of the franchising agreement is the licensing of the intellectual property rights. The franchisor allows the franchisee to use its intellectual property such as trademarks, copyright, know-how, business concepts etc. It is important to specify, in the franchise agreement, which of the intellectual property is being licensed to use.
It should be precisely set out how the franchisee may use the franchisor’s intellectual property. It is also necessary to highlight in the franchise agreement, the prohibition on the usage of the trademark by the franchisee; post-termination of the franchise agreement.
It is necessary for a franchisor to ensure uniformity and consistency across all franchisees’ operation. Initial training is the best way for the franchisor to communicate its core concepts and standards, set forth in the agreement, to new franchisees.
It is the duty of the franchisor to provide as much support, training and supervision as required by the franchisee. This must be mentioned in the franchise agreement as well.
In addition to initial fees, franchisees have to pay an agreed share of the percentage of its sales. There are various structures of royalties used by franchisors, but most of them require franchisees to pay an ongoing royalty, usually a percentage of total sales, typically on a monthly basis.
It must be mentioned in the franchise agreement, the percentage & type of royalty, mode of payment and due dates as decided between the franchisor and franchisee.
Term & Renewal
Franchise agreements usually provide a fixed franchise term of 5 to 10 years. Some of them have renewal options also. Owning to the high amount of investments by the franchisees to acquire the franchise rights, it is necessary to have a long-term contractual relationship.
Also, to achieve great success with your franchise unit, make sure the renewal fee is not excessive. Review your franchise agreement by a legal counsel before signing it.
Advertising & Marketing
Franchisors conduct continuous marketing and promotions to increase their brand power and visibility. Usually, the franchisor promotes the brand, and the franchisee is responsible to contribute by taking part in brand building activities.
The franchise agreement should also cover the aspect of advertising and brand promotion. It should also include the advertising commitment and what fees franchisees are required to pay towards those costs.