Module 10

MODULE 10
FRANCHISING

10.1 INTRODUCTION
Franchising is the process wherein an entity i.e. the franchisor that has developed a particular
way of doing business expands the business by giving other existing or would be entrepreneurs
i.e. franchisees the right to use the franchisors established business model in another location
for a definite period of time in exchange of initial and ongoing fees i.e. royalty. The legal
definition of a franchise Chapter V of the Finance Act, 1994 defines ‘Franchise’ means an
agreement by which the franchisee is granted representational right to sell or manufacture goods
or to provide service or undertake any process identified with franchisor, whether or not a trade
mark, service mark, trade name or logo or any such symbol, as the case may be, is involved.1

10.2 PARTIES INVOLVED IN FRANCHISING
In a typical franchising agreement, there are a minimum of two parties i.e. the franchisor and
franchisee.

§ Franchisor: Any person who enters in to franchise with a franchisee and includes any
associates of franchisor or a person designated by franchisor to enter into franchise on his
behalf and the term "franchisee" shall be construed accordingly.2

§ Franchisee: means an agreement by which the franchisee is granted representational
right to sell or manufacture goods or to provide service or undertake any process
identified with franchisor, whether or not a trade mark, service mark, trade name or logo
or any such symbol, as the case may be, is involved.

1 Chapter V, Finance Act 1994.
22 Ibid.

10.3 PHASES OF FRANCHISING

Preparation

Termination Phases of a Franchise
of Franchise Franchise Agreement
Agreement
Royalties Management
Renewal of of Franchise
Franchise
Agreement

10.3.1. Preparation

While you enter into franchising you’re basically buying a proven business model. Thus, one
must always do the basic research such as would the model work in the desired location
considering the local systems, whether there would be any potential buyers, would the buyers be
ready to pay the same price, whether the proven business model would fit in the market structure
of the locality etc. Before purchasing a franchise the franchisor has to do a proper analysis which
also involves tracking how the original founders of the company have treated their first
franchisees to see if it is a right fit for you which can be done by visiting various franchises of
the same model. The franchisor must also evaluate the profitability of the franchise in order to

make a correct decision. Profitability of the franchise may differ from locality to locality thus the
franchisor is advised to do a comprehensive research before purchasing it. Some franchises need
specific talents or connections to be successful. Research is an essential phase of frachsing as
getting into a franchise agreement is easy but opting out is difficult and expensive. Obtaining
exclusivity of territory should be the primary concern of the franchisor as it makes it much
tougher to build and defend a profitable niche. When evaluating a franchising opportunity, you
should determine if you are comfortable with the extent to which you can modify operations.
Quite often, franchises have strict rules on how to operate the business — often not allowing
innovative franchisees to explore new marketing strategies or product positioning.

10.3.2 Franchsing Agreement

Franchising Agreement plays a pivot role in franchising. Franchising agreement has certain basic
elements which are:

§ Operation of the Business
§ Geographic territory
§ Franchisor Support
§ Duration of the Agreement
§ Royalties
§ Dispute Resolution and Termination of the Agreement.

10.3.3. Management of the Franchise

The franchise agreement lays out all of the rules, restrictions and obligations of the franchisor
and franchisee regarding the successful management of the business. Whether it is a home based
franchise or a standalone business, it is responsibility of the franchisor to maintain the franchise
location in a proper and presentable working condition as a franchisee, the franchisor is obligated
to ensure that any regulations regarding trademarks, patents, advertising policies, etc. is to be
followed accordingly.

10.3.4 Royalty

Royalty is the payment made to the owner of the franchise for using his business model. Royalty
maybe a fixed amount that has to be paid for a definite period or maybe a part of the profit that

the franchisor would make out of the business model, royalty has to be paid in order to carry out
the business. “Royalty payments are typically paid to the franchisor to stay current on
technological advances, as well as to enable the creation and marketing of fresh products and
services. Also, these payments are used to pay expenses that are incurred at the franchisor's
headquarters, such as rent, utilities and employee compensation.”3
10.3.5 Renewal of Franchising Agreement
The franchising agreement is for a definite period and after expiry of such period the agreement
has to be renewed. The franchisor also must renew his respective franchise license in order to
operate his Food Establishment with ease.
10.3.6 Termination of Franchising Agreement
“The franchise agreement fails owing to countless factors. Every year, many investors or
aspiring entrepreneurs enter into the world of franchising by hoping that as a proven concept it
won’t fail. But it’s surprising to know that, many franchisees fail to make profits in the first year
itself and fail to pay royalties which further becomes the reason of franchise termination.” 4
Termination of the franchising agreement depends purely upon the terms and conditions laid
down in the agreement. Thus before signing the agreement the terms and conditions must be read
thoroughly.

3 Don DaszkowskI, About Franchisee Royalties, Published on July 05, 2017.
<https://www.thebalance.com/franchise-royalties-1350411> accessed on 29/06/17.
4 Amanpreet Kaur, Terminating Franchising Agreement, Published on December 2013.
<https://www.franchiseindia.com/content/Terminating-the-franchise-agreement.361> accessed on 29/06/17.

10.4 TYPES OF FRANCHISING AGREEMENT
Franchising Agreement can be classified in the following ways

Franchising Agreement

On the basis of format On the basis
of control of franchising Agreement
over Franchising.

§ Product or Distribution Franchise
§ Manufacturing, Production and

Processing Franchise
§ Business Format Franchising
§ Direct Franchising
§ Master Franchise
§ International Franchise

10.5 LAWS THAT APPLY TO FRANCHISING

LABOUR LAWS

INTELLECTUAL PROPERTY LAWS THAT INDIAN CONTRACT ACT,
LAWS APPLY TO 1872
FRANCHISING
COMPETITION ACT, 2000 CONSUMER PROTECTION
ACT, 1986