India – FAQ’s on Franchise Agreements

What is ‘Franchising’?

Franchising is the process by  which an entity (Franchisor) that has developed a particular way of doing business expands the business by giving other existing or would be entrepreneurs (Franchisees) the right to use the Franchisor’s proven business model in another location for a definite period of time in exchange of monetary consideration.

What are the types of Franchise Agreements?

Following are the types of franchise agreements that can be entered into between the parties:

• Invention Licensing Agreement – This kind of an agreement is preferred when a person has created a new invention and seeks to maximize the fruits of his invention, by firstly patenting the invention and thereafter licensing it on a nationwide or worldwide platform so as to create a great reach. Such an agreement focuses on the licensing of patent and design rights and the manufacturing and marketing of the invention.
• Trademark Licensing Agreement – The trademark is licensed to another person to use the trademark on goods which are associated with that particular trademark so as to build brand equity. This type of an agreement may be for the manufacture, preparation, marketing, presentation, and sale of goods. In these agreements, certain specific provisions are entered to preserve the standard or quality of the goods and the goodwill and reputation of the brand associated with the trademark.
• Character Merchandising Agreement – Under this agreement, the name of a famous personality is licensed to be used on certain products. To ensure protection of the reputation and / or copyright associated with such personalities, special provisions are entered into such agreements to ensure the protection of the same.
• Dealer / Distributor / Marketing arrangements – Under these franchising agreements, the business system or format of the franchisor is adopted by dealers or distributors to gain from an already established business system or format.

How can the Franchisee ensure the protection of trade secrets, business know-how and IPR licensed under the Franchise Agreement?

Whenever a Franchising Agreement is entered into, there is sharing of IPR, trade secrets and business know-how associated with the Franchisor’s business as it is essential for the franchisee in continuing with the business operations. It is also the Franchisee’s duty to take adequate precautions in protecting the Franchisor’s confidential information from the third parties.

In order to ensure protection of such information, the Franchisor can keep a Confidentiality Clause under the Franchise Agreement or can enter into a Non-Disclosure Agreement (NDA) with the Franchisee so as to make the disclosure of such protected information punishable.

Further, the Franchisor can also enter into a Non-Compete Agreement with the Franchisee so as to prevent the Franchisee from competing with the Franchisor during the Franchise Agreement and also be prevented from divulging into similar business post-termination of the agreement for fixed number of years.

What fees can be charged for a Franchise?

The fees charged for a franchise typically includes but is not limited to the following:

• Initial Franchise Fee
• Store Opening Fee
• Royalty
• Marketing/Advertising contribution
• Purchase Price for products, equipment and other items supplied by the franchisor to the franchisee
• Training Fee

Do Franchisees have a right to sell their franchise?

The Franchisor is generally in complete control of the business and he has the right to choose Franchisees for his business. This means that the Franchisors while entering into a Franchise Agreement give away only limited control over the franchise. Therefore, Franchisees do not generally have the right to sell their franchise unless specifically provided in the Franchise Agreement. If the Franchise Agreement contains such provisions, then it should be detailed so that no conflict from the same arises and the Franchisor must always have the final decision as to who can join its network of franchise.

What should the Franchisor consider before entering into a Franchise agreement?

Here are few pointers for the Franchisor to consider:

1. Who the franchisee is?
2. What its track record has been;
3. The business experience it has, if any;
4. Is the franchisee involved in any other businesses, apart from the one it is seeking franchise in;
5. The terms and conditions under which the franchise relationship can be terminated or renewed;
6. The financial condition of the franchisee and its system.