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Jan, 03 2011

Build A Bond That Lasts

No road is long with good company. This Turkish proverb seems to be synonymous with the relationship that is shared by the franchisor and franchisee. Let's understand how both the parties can nurture this relationship beautifully, and profitably.

A franchise agreement is a contract, which is signed by the franchisor (the parent company) and an aspiring franchisee for a stipulated period of time. It is a very critical document, wherein both the franchisor and the franchisee carry certain obligations that are essential for the success of the agreement. Before you take any step further towards signing on the dotted line, it is very important for the franchisee to understand each and every aspect of franchising.

Pre-requisites

If anyone/existing owner is thinking of getting into the franchising business, then he/she is required to do his/her homework well and learn the complexities and identify the nuances of franchisor-franchisee relationship. This association is a kind of business agreement governed by contract agreement, under which both the parties have specific rights and responsibilities.

Though franchising is considered to be the profitable business avenue for franchisor and franchisee, if not entered appropriately or not looked after well, it could prove quite the contrary. Before taking any step further towards signing the contract, the franchisee must evaluate risks or threats that could arise while franchising. Before starting your journey with the franchisor for a specific time period, the franchisee must deal with several issues in advance.

While entering into any franchise agreement, both the parties should define their territorial, business expectations and time period for the franchise. As per Karnika Seth, Attorney at law & partner, Seth Associates, Advocates and Legal Consultants, “In addition, they should also clarify other aspects such as operational support, royalty payments, marketing strategies, advertising revenues and long-term interests of both the parties. A high degree clarification in thought and agreement is recommended to ensure best results and a long-term business.” After entering the franchise gung ho, due to some reasons if something goes wrong as in if the franchisee fails to meet the performance levels, the franchisor should always lend a hand to the franchisee and if such circumstances occur, then it's important to innovate ideas to support the franchisee.

Why relationship fails?

In India, some aspiring entrepreneurs believe that franchising is a proven concept and with this misconception, they used to stitch deals and later on, they tend to suffer losses. Previously, franchisors were accustomed to close the deal with the aspiring franchisees, who were lacking knowledge about the franchising system. Even the new franchisees never negotiated on the terms of the agreement, as they were unaware of certain clauses. Other common areas of dispute that affect the liaison between both the parties include  in the past, franchisees were not capable of operating the centres owing to the improper training and support systems rendered by the franchisor, or if the franchisor is into a kind of litigation, generating low revenues and failing to pay royalties and upholding the franchise standards. Other reasons behind the failure are recruiting unqualified franchisee with no knowledge and experience in the given industry, zero involvement of franchise lawyer by the franchisee to understand the clauses in the agreement, irregular audits conducted by the franchisor, not offering exclusive territory, franchisor urging the franchisee to share his/her customer's list, tweaking the product/service without franchisor's permission, tying up with independent/existing owners who do not follow the guidelines provided by the franchisor and do not pay attention to maintain uniform operations at outlets.

Believing that differences can crop up owing to multiple reasons, Seth says, “In a franchise model, most of the differences crop up over certain key factors such as profit sharing, time period of maintaining the franchise agreement, royalty issues, trade dress disputes, franchisor's or franchisees collaboration or possible collaboration with other brands, short term and long-term business interests of either of the parties, inflated expectation by either of the parties, lack of product appeal, poor marketing strategy by the franchisees, market saturation, and in some cases, poor location selections.”

There are various legal issues that may affect the relationship. On this, Waltraud Martius, Franchise Consultant, Syncon International Franchise Consultants, elucidates, “A balanced franchise agreement is the best insurance against legal issues in the franchisor-franchisee relationship. The rules, rights and responsibilities of the franchisor and the franchisee are defined in the franchise agreement. If the franchise agreement is written to the point, then there is no room for vague interpretations for both the parties. Interpretations may lead to wrong expectations and in the long run to (legal) arguments.” Adding more to it, Martius says, “In the beginning of a franchise partnership, the so called 'pre-contractual duty of disclosure' is very important. Before a franchise agreement is signed between the franchisor and the franchisee, both the parties act in the so called time span of the 'pre-contractual duty of disclosure.' It is the obligation of the franchisor to fully inform his franchisee about all potential risks, investments and profits with the franchise system. A checklist of the 'pre-contractual duty of disclosure' ensures transparency of all the terms and conditions of the franchise system.”

Evolution of relationship

In the last decade, the franchisor-franchisee relationship has evolved in a big way in India. Today, franchising is reckoned to be a major contributor for bringing international labels in the Indian market. In reality, the inflow of foreign labels has stimulated the fierce competition, which ignited the fire among the Indian brands to organise their systems to avoid discrepancies. Internationally, the franchisors had already tried, tested and re-invented the wheel of franchising by giving serious attention towards framing and drafting the contract document and setting up stringent criterion of selecting the right franchisees. By learning from the errors committed in the past, franchisors in India are nowadays paying more attention on certain areas that hinder their growth in the market.

Building a bond, trust

Both the franchisor and the franchisee should remain on the same wavelength, as it helps them to enhance the bonding between each other by building trust, commitment to innovate the system, listening to grievances and communicating to each other on regular intervals and creating a win-win relationship. After all, it is an agreement which binds both the franchisor and franchisee for a number of years. Hence, both the parties must strive to understand the intricacies of this association.

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