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All about Franchising Agreement | Franchisee and Franchisor

Not everyone who wants to start a business has the expertise and funds to do so. A Franchise is a business model where a person can use the brand name of an already existing business by making a franchising agreement. You may have heard of Fast Food Franchising which is growing at an increasing rate. Let’s see in detail about Franchising in this article

Points covered in this article are

  1. Franchising Agreement

  2. Royalty to the Franchisor

  3. Terms of Business

  4. Benefits of Franchising

  5. Use of Intellectual property such as Trademark and Copyright

  6. Government regulations on Franchising

1. Franchising Agreement

Franchise is using the brand name and certain other benefits of a well established company in the business. To start a franchise, an agreement has to be made between the Franchisee (the purchaser of brand value) and the Franchisor (the owner of such brand)

A Franchise agreement is a legal document created to agree on certain conditions under which the Franchisee shall operate. Every Franchise agreement can vary based on various factors such as where and how a Franchise unit should operate and the royalty to be paid to the Franchisor

2. Royalty to the Franchisor

Now that we know that a Franchise unit uses the brand value or goodwill of a reputed brand, all these benefits are provided on a mutually agreed Royalty rate. A part of profit and initial fees is paid to the Franchisor as royalty. This is to use intellectual property of franchisor and management services provided

3. Terms of Business under Frainchise

A Franchise agreement provides detailed ideas about terms of operating the franchise. These terms vary for each franchise and the type of market they are in. In the case of companies like KFC, the taste and the outlook of the store has to remain the same. But for educational institutions there are no such requirements.

● There has to be specification about the goods or services that shall be offered by the franchisee.

● The Franchisee has to maintain proper books of accounts to be checked by the Franchisor so that there is no fraud or misrepresentation by franchisee

● The franchisee unit has to run the business as per the standards of operations fixed by the franchisor.

● The franchise unit has to follow all rules of the law under which the business is registered

● The supplier from where raw materials are to be purchased is specified by the Franchisor. Usually a Franchisor buys from same supplier as the costs are reduced

● The franchisor has the right to inspect the unit at regular intervals to see if its operating on set standards

4. Benefits of Franchising

There are a lot of franchise units of brands such as KFC and Dominos. These units are formed on an agreement where the Franchisee has to follow certain rules set by the Franchisor, such as every KFC unit has the same uniform for its staff, same menu, same recipe etc. The reasons why people choose Franchising over starting their own business is

1. Capital

The Franchisor contributes in every franchise unit as these businesses are considered as their own. From setting up the physical store to training the staff on management of the business the franchisor contributes in the franchise unit keeping in mind brand image

2. Brand Value and Customer Loyalty

One of the biggest risks of starting one's own business is attracting customers. Brand name of an already successful business brings loyal customers to you

3. Security of business

Reason why lots of people choose Franchising is for the backing up by an existing business. There is a set rules and system to be followed which is previously proven to be successful

4. Chances of profit are high

As mentioned before because of the brand loyalty, customers are easily drawn. The risk of losing the market is less

5. No experience required

Many people tend to start business without any knowledge of the market or management of the business. In case of Franchising, the Franchisor provides training and gives instructions as to management

Even with all these advantages there are demerits of Franchising. The franchisee is under control of the franchisor and has to conduct business on set rules. The franchisor also has the risk of scams and infringement of intellectual property by the franchisee and it may affect the company's brand image on large scale and cause huge losses

6. Use of Intellectual property such as Trademark and Copyright

One of the most important elements in a franchise agreement is the right to use of trademarks of the franchisor. The franchisee shall be given rights to use all the intellectual property as those are the fundamental part of any business. The franchisor must have registered the trademark and have exclusive rights for use of a trademark to transfer the rights to the Franchisee. The franchisor must state the word or marks or symbols for which trademark has been registered or applied.

The franchise agreements have clauses that require the franchisee to follow so that there is no case of trademark infringement or avoid damage of trademark during usage by the franchisee. The franchise agreement clearly specifies the ownership details of the trademark with provisions prohibiting the usage of the trademark by franchisee post-termination of the franchise agreement.

7. Government regulations on Franchising

In India there is no law with regard to Franchising. If a franchise unit of a foreign company is incorporated, it can be governed in accordance to such foreign country's law. But the Franchise unit has to abide by Indian Contracts Act, 1872. As there are no specific laws, the basic rules of a contract should be followed.

Considering the advantages of Franchising and many units which have been successful in earning high profits, more and more people are opting Franchising. But there are chances of failure if business is started without prior research

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