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franchising aspectsJul 26, 2009

Franchise agreement checklist

By Neha Malhotra
Sub Editor, Franchise India Holdings Limited, Web Division
Franchise agreement checklist

India continues to hold the attention of major international brands around the globe who do not want to miss out on the country’s phenomenal growth potential. Indian investors (both companies and high-net-worth individuals) are showing a growing interest in entering partnerships with international brands. This greater interest from Indian investors has been fuelled by the recent election results in India. The new Indian government is reform oriented who are promoting India as a stable environment, fit to conduct business. There is also a growing expectation of relaxation in FDI restrictions in India.
Securing the exclusive Indian Master Franchise rights or even Regional Franchise rights to develop a new international brand in India is a rewarding position, one which the investor can look forward to for bounteous returns and expansion of franchise business across the country, for years to come.  
However, to arrive at the point of signing the agreement requires a good amount of homework, and there are many factors that the investor needs to take into consideration before finally stamping his signatures over the deal. The following checklist provides some key considerations which the Indian investor should take into account whilst becoming the master franchisee of a foreign brand.

The brand
•    Investigate the brand’s history and track record. How long have they been in business? If they have not been successful in other foreign markets, why do they believe India will be different?
•    Is the franchise system based on a solid business model?

Due diligence
•    It is the investor’s responsibility to carry out a thorough research and assessment of the franchise business, its key financial reports and terms of proposed business. All figures provided by the international brand must be evaluated in terms of local economic measures and yardsticks and verified by the investor.
•    The investor should also contact other franchisors operating in other overseas markets to acquire an understanding of their experience and the challenges they had faced.

•    The investor should also try to discern what evaluation the franchisors makes of him. If the latter is only interested in Investor’s financial status and not of long term mutually beneficial business, it would be wise to evaluate brand’s strategy itself. The questions and information they require from the investor should be a direct reflection of business prospective and brand’s success in India. The foreign brand should have a clear vision of what they desire from the Indian master franchisor and their suitability for the role.

•    The investor should visit the home country of the brand to verify for himself the status of the brand. It is imperative indeed.

Competition
•    The investor should have a deep understanding of existing players in their segment as well as of those who may enter the market in future. One must also look at indirect competitors who may be marketing in alternatives or substitutes of your brand product. For example, the investor is opting for a coffee lounge franchise, he should also be aware of juice bars operating in his vicinity, as they may take away some of his market share.

Consumers
    
•    The Investor should also acquaint himself thoroughly of customer preferences, buying habits, economic conditions and social trends in context of the brand product he is foraying in. Whether the brand fits the Indian milieu, their customs and choice? Only after satisfying on above points, he should go in for the brand.

Positioning

•    The investor must make sure that there is a complete alignment with the foreign brand, as to how the product or the services will be positioned in India. If the investor and the brand owner have conflicting perceptions on how the concept should be positioned, then conflicts may arise and the business may flop.

Master franchise support
•    Paying the Master Franchise fees for a foreign brand is a serious investment of capital – and it is not just the ‘brand’ that one is investing in. The franchise agreement must cover
all aspects of support and training the franchisor needs to provide over the period of contract, and which the investor feels is necessary to launch and sustain the business in India. A comprehensive schedule of training needs to be drawn and implemented.
•    The foreign brand needs to be completely committed to ensuring the success of their concept in India in partnership with the investor – not just sending an email each month requesting their royalty cheque. A great brand should offer on-going training and updated programs.
•    The Investor should ensure that the training from foreign brand is localized in tune with the Indian market.

Franchise terms
•    Be clear on the other franchise terms such as renewal structure, first right of refusal and pre-conditions of such renewals.
•    Understand the role of sub-franchisees in the agreement, if allowed, when and at what scale.

Flexibility
•    Due to India’s vast size and diversity, the business model will no doubt require certain changes and adaptations to suit to local market conditions. This strategy needs to be clearly defined prior to signing an agreement, e.g., to define what areas of the business model the foreign brand is willing to adapt and what areas shall be no-go zones. The use of an expert consultant who can formulate the market strategy is always advisable at this stage.
•    Fully understand the terms of suppliers – does the agreement define specific suppliers, and if so, does this make financial and logistical sense for Indian market?

Intellectual property
•    Has the brand (trademarks) been registered in India? Who will own the IP of the India operations – the master franchisor or the brand owner?

Restraints
•    Many Indian investors take on an international Master Franchise in order to diversify their business portfolio. One must discern what exclusive clauses are in the franchise agreement, whether these prevent you from conducting a business you are already in, or would bar you in future.

Expert advice
•    It is always advisable to take the guidance of a professional who specializes in franchise negotiations. A franchise consultant can be an invaluable resource to engage for the entire process as their expertise can alert the investors to all the potential pitfalls and avoid unnecessary delays and setbacks, ensuring a mutually rewarding relationship.

While these areas are very helpful for making the right decision, they are by no means exhaustive for your search. There would be a number of things to consider which would be typically characteristic to each business opportunity in discussion.

Related: Maximise Profits With Pilot Franchise

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Raj Saun 2009-11-09 22:00:46 Reply |
I like know more about hotel franchise in india
Hozefa K 2009-11-08 02:53:56 Reply |
Good, informative. I would also like the services of a Franchisee consultant. please advice us or get in touch with us. thanks again.
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