Franchise agreement is something that should be very well valued and understood by anyone who formulates it. Franchise agreement refers to the legal contract that declares the tie -up companies that are giving and taking up the franchise of a certain brand. An agreement is designed to benefit both parties. The one buying the agreement invests heavily in buying the franchise of any established brand and that is why it is also entitled to get some right to safeguard their investment.

What is discussed in a franchise agreement?

The two parties namely the franchisor and the franchisee prepare a legal document to sign amongst themselves where they discuss the terms and conditions of their exchange of IPs.

In these papers a license is provided to these buyers. This license allows another party to do something or use something of value mostly IPs. In most cases of franchising agreements, this exchange indicates.

• The franchisor allows the franchisee to use the franchisor’s intellectual property, systems and brand.
• The franchisee acquires the rights to open a business with the franchisor’s intellectual property, systems and brand, but they are by certain clauses that they must follow in order to gain access to franchisor’s IPs.

This might sound like a not so difficult process but these contracts can get very difficult to understand and that is why you will definitely require a lawyer in this case to help you out in understanding and preparing an almost thirty pages long document elucidating all terms and conditions that you want in it.

Things that you must include while drafting a franchise agreement:

1. Place of operation: Make sure that you assign the place of operation in your paper work clearly and deny the violation of it strictly. Operations anywhere else other than the said location shall have its consequences.
2. Royalty: Detailed and laid out discussion about the royalty structure that the franchisee needs to pay to franchisor every month from the sales generated must be discussed in the agreement.
3. Validity of the franchise: Franchisee’s must be provided with a given time frame in which they will be allowed to sell their products under the brand name of the company that they are buying the franchise from.
4. Fees: The fees paid to obtain the franchise of the brand that you are making an agreement with should also be mentioned in the document.
5. Training and support: Most companies or franchisor’s prefer giving their franchisee team an initial training and support to the human resource that they pull in because they want uniformity in the services provided under their brand name irrespective of the geographic borders.
6. Operation: Operation of the business is very clearly stated in the contract to give a good idea about how the business should run.

Checklist for a franchise agreement:

• The equation between the franchisee and the franchisor should be very well described in the contract to begin with.
• The tenure needs to be printed on the documents as well in order to avoid any controversies later. If both parties are willing enough to extend the tenure then that should also be allowed according to the franchise agreement.
• Before the signing of the franchise agreements, topics like royalty, fees and their time and modes of payments should also be discussed clearly and this should also be there in pen and paper.
• As we mentioned earlier, site selection and development of the business is a very integral part of this whole franchise business. The franchisor has full rights to checkout the location and also train your team before you start the business. This is done to keep up with the image that the franchisor brand already has set for itself in the market.
• Business operations about detailed information of the support to be provided by the franchisor and the duties of the franchisee. Some of the points under this covered here will include-

1. i) The operation of the franchisee unit, as per the operating standards set by the franchisor.
2. ii) The goods and/or services the franchisee is allowed to sell to its customers.

iii) The goods and/or services the franchisee needs to source out or buy only from the franchisor.

• The franchisor is also meant to spend generously behind the branding and advertisements of the upcoming outlets and to balance this franchisee’s responsibility according to the franchise agreement will be to conduct brand building activities with his/her team.
• Intellectual properties and trademarks of the franchisor cannot be used by the franchisee’s post the termination of their franchise agreement. This is crucial and non-negotiable in all franchise documents. It helps the franchisor to safeguard it’s creative assets against anyone who tries to plagiarize it.
• Termination clauses should be discussed in great detail in all franchise agreements. Fines and penalties to be paid in cases of violations are also discussed under this section.

FAQs:

How can I get a franchise agreement in India?

India has no specific law discussing franchise agreement and its clauses like termination, non-disclosure or anything else but you can look up a good lawyer and ask for help from him/her to get your franchise agreement papers ready.

Is GST applicable on franchise fees in India?

Royalty and franchise fees payments fall under Chapter Heading 9983 as “Other professional, technical and business services” and Service Code (Tariff) – 998396-Trademarks and franchises, that needs 18% GST.

What are the types of franchise agreement?

There are primarily three types of franchise agreements and they are as follows:

• Single Unit Franchise Agreement
• Multi-Unit Franchise Agreement
• Master Franchise Agreement

Who pays tax in a franchise?

Where a franchisor receives royalties, franchise, or service fees, tax needs to be paid under the Income Tax Act, irrespective of the fact whether the franchisor is an Indian or a foreigner.

Is TDS applicable on franchise fees?

There is no such restriction on franchise agreements till date in India.

What is the number one franchise in the world?

Well franchise business is mostly dominated by the quick service restaurants across the globe and the top players in this field are McDonalds, KFC and Burger King.