Advisory Feb, 03 2010

Watch out for legal traps

Despite the fact that franchising is a phenomenal way to get started with a business of your own, it can at times face adverse effect if the legalities surrounding the business are not identified well. Read on to know more

By Ramanjit Kaur
Feature Writer
Watch out for legal traps

Franchising is a commendable option for an aspiring entrepreneur to start a business and generate sustainable revenue out of it. If you are an aspirant of a franchise business then knowing the nitty-gritty of franchising and various legal issues associated with it is the first and foremost task in front of you.

The best way to identify the legalities of any franchise business is by comprehending the franchise agreement. Franchise agreement is a legal document prepared by the franchisor and the franchisees are supposed to sign it before initiating the franchise business. It governs the franchisee/franchisor relationship. There is hardly any set format to develop a franchise agreement and it may vary depending upon types of franchise.

Components of franchise agreement

  • Training and ongoing support from franchisor
  • Territory issues
  • Tenure of the Franchise Agreement
  • Franchise fee and Royalties
  • Trademark and Patent
  • Advertising
  • Operating protocol
  • Renewal rights and termination/cancellation policies
  • Issues related to reselling

Franchise agreement is the only official binding in India that manages the relationship of both the parties. Before signing a franchise agreement, it is advisable to consult your franchise lawyer who should have a good knowledge of franchise law.

Call for cautiousness

No doubt, franchise agreement clarifies everything related to taking up and managing franchise business but still there are certain issues that a franchisee needs to take care before signing the agreement. Neglecting such issues in the beginning may create problems later on and might lead to failure of franchisee or cancellation of the franchise agreement.

Trademark protection

The value of a franchise is based on the intellectual properties, which include trade marks, copyrights, patents and other confidential business information. Intellectual property rights are the most important and valuable assets for a franchisor in its franchising business. Therefore, the franchisor carefully utilises the franchise agreement to limit the franchisees to use the intellectual property rights with stringent conformity. So, as a franchisee you need to investigate whether the trademark is registered under the local government authority or whether the franchisor encounters any challenge with its trademark.

Exclusivity of your franchise territory

Once you have confirmed the validity of the trademark, the next thing you need to know is the exclusivity of your franchise territory. You have to determine whether you will be granted the exclusive rights for your franchise territory as it ensures enough opportunities to increase the footfalls of your outlets thereby leading the franchise to succeed. Besides, in certain cases many franchisors help their franchisees in finding apt location for opening the franchise outlet. So, you must ask your franchisor whether s/he will assist you in site selection or in leasing out the location.

Involvement in competing business

Franchisee need to carefully comprehend the obligations given in the franchise agreement with respect to his involvement in another side business. For instance, there are certain circumstances under which a franchisee is not permitted to operate his own business along with handing a franchise simultaneously. It may lead to cancellation of the franchise agreement.

Vendors related issues

You also need to confirm whether the franchisor has arrangements in place to provide you with the necessary products needed to run the business especially when the success of the franchise depends on the specific quality of the products. Additionally, you have to ask your franchisor whether there will be any restriction on the sourcing of the products or not.

Franchise transferability

Being a franchisee, you have to clarify certain crucial issues as well that can later create conflicts with your existing or future business interests or activities. For instance, you must check the franchise agreement for your transferability rights that permit you to transfer your franchise to another person. However, there are certain franchising companies that do not allow the franchisees to sell the franchise to a third person rather sell it back to the parent company.

Restrictions regarding renewal of the franchise agreement

A franchise agreement may also encompass a number of restrictions regarding the renewal of the franchise terms and the termination of the franchise contract. So, being a franchisee you must know under what circumstances you will be able to terminate the franchise contract and whether the change in the location or lease expiration can prohibit the renewal of the franchise terms.

As a franchisee you need to thoroughly check all the above representations before signing the franchise deal. So, be diligent and take advice from a specialist to avoid future disputes and franchise failures.

Related: Recession, not a big deal

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