Question

You own a distributor-style franchise, you have a client interested in becoming a franchisee. Please create a franchise agreement for your client by stating the name of the franchise, the purpose of the franchise and include (7) basic elements/terms (50-150 words each) in your franchise agreement with clear explanations of each element. Make the agreement unique to your franchise.

Answer 1

Franchising is a concept which is applied by entrepreneurs or companies to expand their range geographically. In simpler terms, Franchise business is a kind of business in which the owner or the franchisor the rights of its business logo, model etc to a third party i.e. a franchisee and in return franchisee pays a sum of money that can vary according to the terms and conditions pre decided. The franchisor provides full assistance to the franchisee in setting up the business; be it staff recruitment,training,infrastructure etc.The distributor Franchisor allows the franchisee to sell the product or service of the business already established in the market place.

Franchise Agreement: It is an official document which consists of terms and conditions stated by franchisor to the franchisee. It includes many elements related to franchise and both the parties need to consent and sign on the agreement.

Name of the Franchise: ABC Spices private limited; deals in spice distribution across the world and is successfully running with 500 outlets all over.

Franchisor: ABC Spices private limited

Franchisee: XYZ Corporations

Purpose of the Franchise: Business expansion

Basic Elements of Franchise Agreement:

1. Granting License: This section will explain on the license a franchisor is granting to the franchisee. It will decide the limit of license as well the duration of it. The grant of license will give a right to franchisee to operate on the name of the franchisor in a particular location. It also includes the fees to be paid for the license specifically and weather it is a fixed pay or a recurring one.
2. Standards for the usage of Trademark: In franchise business the franchisor gives right to the franchisee to use registered trademark of the company. This clause will set standards for the franchisee to which extent they can use the trademark and in what all activity it can be optimized. The language used for this clause is as such that the franchisee is the license holder and not the owner of the trademark. It also states that the franchisee has no right to alter or change anything in the trademark.
3. Time frame of Agreement: This section highlights the time or duration of the agreement between both the parties. It will comprise of start date of agreement, end date if applicable. Now let’s assume that the agreement is made for 10 years then it will be renewed after 10 years depending on the will of Franchisor and the franchisor will have to intimidate franchisee at least before 6 months of the end date.
4. Standards of Franchise Location: The franchisor will list the standard here for the franchisee to accomplish in terms of the location decided. To protect the brand and to maintain the quality the location has to be in line and the franchisor set pre opening standards for the same. The franchisee need to adhere to each and every minute detail while constructing the place and franchisor will have the right to inspect the place and suggest necessary changes if applicable.
5. Franchise Fee or Royalty: This section highlights the most important aspect of Franchise agreement. It decides the fee to be charged by the franchisor to franchisee for the franchise business. It can be based on Profit sharing model or Royalty model or Recurring fees periodically.
6. Other Standards: After location comes some other standards which are to be maintained by the franchisee. As a brand franchisor need to make sure that the product is delivered in the same manner with same quality uniformly across the world. Franchisor helps in terms of maintaining quality by providing training to the franchisee and assisting them in future also.
7. Indemnification Clause: This section takes care of any violation of law by franchisee. As a franchisee it is expected that they will comply with the local laws or state laws and if they fail to do so in any situation the franchisor will have the right to revoke the agreement and in case of any losses, franchisee will bear that.
8. Insurance Coverage: One of the important clauses of the agreement that ask for an insurance cover for both franchisor and franchisee. Franchisee will purchase an insurance cover of a particular amount which will insure both the parties. The franchisee need to submit all the related documents for that and has to pay the premium at regular intervals.

These are some of the elements decide by both the companies i.e. ABC Spices private limited & XYZ Corporations for the franchise agreement.