Franchising Agreement

Franchising is an ever popular way to expand a business establishment. It has been the mantra for many a successful business houses including global giants like McDonald’s where more than 80 percent of the facilities are owned by franchisees.

Franchising Defined

Franchising is a system where a business or ‘Franchisor’ expands by transferring a substantial portion of its risks and costs to a second party called ‘Franchisee’ or ‘Grantee’. The second party goes on to utilise the goodwill of the first party to earn substantial income. Thus, it is a win-win situation for both the parties. In this system, the Franchisors allow the Franchisees the rights to carry on a particular business by utilising their own know-how and Intellectual Property rights.

There will be an element of control exerted over the grantee’s or franchisee’s business by the franchisor or grantor, in order to ensure uniformity in quality. This is precisely the same reason why a Big Mac tastes the same across different lands, far and wide.

Franchising is done for a monetary consideration as agreed by both parties. Certain types of franchising requires investment in plant and machinery by the franchisee. The agreement may also require the franchisee to deal exclusively with the franchisor’s products. It is not required for the parties to be located in the same country in order to create a franchising agreement. It is also not required that a franchising agreement should be related to an already established or existing business. A franchisor may as well be a startup.

Purposes of Franchising

The main purpose of franchising is to venture into new geographical areas and to explore new markets – especially in foreign countries. It can be the first step towards capturing foreign markets, the other being the establishment of subsidiary companies or joint ventures.

Franchising is a simpler and quicker option in order to expand business with easier legal processes. From the franchisee’s point of view, it translates into better return on investment and profitability since it deals with products and services that already have goodwill affixed to it.  It also reduces the prospect of losses for the franchisee on the investments made.

Things To Consider Before Entering Into A Franchising Agreement

The franchisor needs to ensure that the proposed franchisee has sufficient capital for making the required investments. It is also important that the franchisee maintains proper books of accounts in order to ensure that the payments of royalties and fees are made in time. The franchisee needs to ensure that the franchisor has a goodwill and that he/she will not have to face troubles in marketing and selling the product/service. The terms of payment should be clarified initially as to the amount payable at the beginning as well as the royalties to be payable at fixed intervals.

The key to an effective and successful franchising agreement is transparency and mutual cooperation. This can go a long way since franchising is a system where constant support is required for success. It is important that sufficient information pertaining to both parties should be shared with each other beforehand to analyse the profitability and future prospects of their proposed franchising arrangement.

Other Legal Requirements

The permission of the Reserve Bank of India (RBI) is required in case the franchisor is a foreign company and the franchisee has to make lump sum payment. The franchisee also needs to take RBI’s approval in order to acquire technical knowhow from a foreign company. The RBI reserves rights to make modifications in agreements related to payment in foreign franchising agreements. It may also designate a bank as an authorised dealer for making and receipt of fees and royalty in such agreements. The franchisee is required to give a guarantee to the income tax authorities pertaining to the tax liabilities of the franchisor for revenues accrued/earned in Indian territory.

The franchisee need not take RBI’s approval for engaging the services of any foreign professional provided it is for a duration less than three months. No foreign franchisor is allowed to acquire any business in India without the prior approval of RBI.