franchising aspects Sep, 05 2016

The On Paper Franchising Checklist

Franchising in India is gaining pace because of global brands entering India offering promising returns, however partnering with a brand has legalities attached to it which are to be observed by the franchisees. Read on to know more..

By Deepankar Hemnani
The On Paper Franchising Checklist

Culminated by word of mouth, goodwill and other factors which are not discussed on paper are the core elements that decide the legalities of the franchising partnership between the franchisor and the franchisee. If to be looked upon, franchising if compared with the west is different if compared with the east. However, there are no extraordinary legal catches that should be considered but it is the mindset that sets it apart from other franchising partnerships happening on the other side of the world.

In India, People consider franchising as just an option to earn side income and as an opportunity which for some might be as a backup plan but for some might seem like a source for alternate earning after the base business, having said that Sanjay Coutinho, CEO, Baskin Robbins, India elaborates “In India, franchising is a relatively early stage concept. People use this opportunity as an additional investment. A few investors also use this as an opportunity to symbolize status. Hence they don’t invest too much time in physically running the business and have to hire people to run the business.”

In order to understand franchising better, it would be useful to consider some of the usual types of franchising agreements.

(a) Invention Licensing Agreement: This kind of an agreement is common in a situation when a person has created a new invention and seeks to maximize the fruits of his invention, by firstly patenting the invention and thereafter exploiting it on a nationwide or worldwide platform. Such an agreement focuses on the licensing of patent and design rights and the manufacturing and marketing of the invention.

(b) Trademark Licensing Agreement: In order to build brand equity, the owner of a trademark can grant a licence to another person to use the trademark on goods, which are associated with that particular trademark. This type of an agreement may be for the manufacture, preparation, marketing, presentation, and sale of goods and would generally contain provisions to preserve the standard of quality of the goods and the goodwill and reputation of the brand.

(c) Character Merchandising Agreement: In such an agreement, the name of a famous entertainment or sports personality or probably a fictional or graphical character is licensed to be used on certain products. This kind of an agreement would necessarily concentrate on provisions to protect the reputation and / or copyright associated with such personalities and / or characters.

(d) Dealer / Distributor / Marketing arrangements: These are the most common franchising agreements where usually the dealers or distributors adopt a particular business system or format of the franchisor. Generally these agreements are entered into in cases of dealerships with automobile companies (such as with Hyundai and Maruti Udyog), food and consumer goods chains (such as McDonalds and Barista), petrol pumps and gas stations (such as Hindustan Petroleum) et al.

Negotiating a Franchise Agreement

It is essential that a franchise agreement is drafted and negotiated carefully as it forms the bedrock of the franchising relationship. Some of the important issues that a franchising agreement needs to address are outlined hereunder.

  • a)Scope and Subject Matter of the Franchise: At the very outset, the franchise agreement should lay down the nature of the business or project that the parties have in mind, the geographical scope, the subject matter and the term of the franchise. The subject matter could either by a product or a business format or system. Based upon the subject matter, the agreement will need necessary tailoring.
  • b)Licensing and Protection of Intellectual Property Rights: Intellectual property rights are the core of any franchising agreement. Therefore, it becomes necessary to determine the intellectual property (such trademark, service mark, trade name, copyright, patent, trade secrets or know-how) associated with the franchisor and the exact and specific intellectual property he/it is licensing to the franchisee. All such licensing must confirm to the particular intellectual property legislations in India. The franchisor must limit the manner and circumstances in which the intellectual property is to be used and should ensure that it is not misused by the franchisee in a manner to cause damage to the brand and goodwill of the franchisor. In the event the franchisor has transferred or may transfer some trade secrets or confidential information to the franchisee, the agreement could stipulate that such information be kept privileged, during and post-termination of the agreement.
  • Dos and Don’ts
  • Every agreement contains certain activities that each party must perform or refrain from performing during the term of the agreement. These activities are obligations on the concerned party and they must be adhered to, or else it could lead to a breach of the agreement. While drafting these regulations, the franchisor must try and incorporate all conditions necessary to protect his brand and also to ensure that the franchise is successful and profitable. Some of these obligations are stated hereunder.
  • Services to be rendered: The agreement must clearly outline the duties and services to be rendered by the franchisee. If necessary, a separate schedule could be attached to the agreement
  • Infrastructure and Minimum Investment: The franchisor must also ensure that the franchisee has the adequate financial resources and infrastructure to carry out the business operations. The franchisor could specify that the premise be of a certain size and that the franchisee should have a minimum amount of infrastructure to operate the franchise.
  • Location of the franchise outlet: The franchisor would desire that the franchise outlet is located in a place that would attract several customers. Therefore, the franchisee may be obligated to first select the place and then get it confirmed from the franchisor. The franchisee could also be obligated from not commencing any competing business in the same area or location after termination of the franchise agreement.
  • Restrictions on suppliers: The franchisor may also have a good negotiating power with certain suppliers and may obligate the franchisee to purchase materials on from such suppliers. This may also be to ensure the quality and standard of the final product.
  • Accounts and Inventory Audits: The franchisor may also want to supervise the activities of the business operations and may require carrying out periodic inventory and account audits. The franchisor could also ask the franchisee to provide periodic reports on the functioning of the franchisee’s business. Speaking about the support, Deepika Arora, Regional Vice President, Eurasia, Wyndham Hotel Group adds “we conduct regular ‘webinars’ on various aspects such as productivity through various online channels, how to fill your RFP, how to prepare for a quality audit, how to enrol members in our loyalty program, etc. Our Operations team conducts monthly review calls with the hotels to understand their issues and also apprise them about the latest tools and initiatives that they can apply at their properties.”
  • Good Faith: A clause requiring the franchisee to act equitably and in good faith normally finds place in most franchise agreements. This is more of an omnibus clause as it could include any and every possible action of the franchisee.

Related: Procuring the funds

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