7/10/22, 4:35 PM Franchise agreement - iPleaders

Franchise agreement
By Sneha Mahawar - July 9, 2022

This article is written by Nuthanaganti Tejaswini pursuing a Diploma in General

Corporate Practice. This article has been edited by Ojuswi (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Table of Contents 
1. Introduction
2. What is a franchise
3. Type of bankruptcy the franchisor chooses
4. Franchise agreements
5. What shall be included in the franchise agreement
5.1. Franchisor and franchisee details
5.2. Location
5.3. Royalties
5.4. Duration
5.5. Initial fee and related matters
5.6. Trademark
5.7. Training & support
5.8. Operations
5.9. Termination Mechanism
6. Advantages of franchise agreements
7. Disadvantages of franchise agreements
8. Documents required for franchise agreement
9. Conclusion
10. Reference

Introduction
Expanding the brand value and its branches in any business is the most crucial part on
top of that strategizing the idea would be the core object to discuss. Since many
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business modes can help to grow and expand any entity, however, franchising is one of
the best strategies for expanding the brand value of your business. McDonald’s is one of
the top money-making franchises, its iconic symbol of fast food, sandwiches, burgers,
chicken nuggets, and a wide variety of other signature food items expands its brand
value. It operates more than 37,000 restaurants all over the world. 

This article covers how a franchise works, the type of bankruptcy the franchisor chooses,
the franchise agreement, the advantages and disadvantages of the agreement, and
required documents. 

What is a franchise
A franchise is a strategy of distributing products and services of a business, which have a
good brand value in the market. In simple terms, creating a brand and distributing that
brand is referred to as franchising. It includes both a franchisor and a franchisee. The
Franchisor, distributes and sells the franchise opportunities of their business to a
franchisee. The franchisee duplicates the franchisor’s business for a certain period and
has the right to open stores and sell products or services using the franchisor’s brand,
strategy, business idea, intellectual property, and expertise. The franchisor provides
continual guidance and support concerning general business strategies such as hiring
and training staff, setting up shop, advertising its products or services, sourcing its
supply, and so on. The franchisor’s parent role is a continuance commitment until the
termination of the franchise agreement. The Franchisor always makes sure that the
franchisee’s maintenance is up to the mark.

To become a franchisor, one must have a well-recognized business, and a valuable

brand, so the business can expand through the franchise. Franchisees must pay royalty
and some initial fee to obtain the right to do business. Well-known corporate franchisers
include KFC, McDonald’s, and Subway. The relationship between a franchisor and a
franchisee is like an advisor and advisee, however, the franchisor’s advising role is not at
all free; it is part of the purchase by the franchisee. Hence franchising is the best method
of expanding the brand value and the theme of any entity.

If any franchisor or a franchisee wants to enter a franchising business, they can enter
into an agreement or a contract called Franchise Agreement.

Generally speaking, a franchisee is not protected by the agreement if the franchisor

becomes bankrupt and a court stay will be imposed on all activities of the franchisor and
there the franchisees aren’t allowed to take any legal action against the franchisor.

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Type of bankruptcy the franchisor chooses

According to chapter VII of the Bankruptcy Code, the franchisor’s assets are liquidated to
pay creditors. The companies usually opt for this route because it’s flat going out of
business and it is highly unlikely that the franchisor will be able to meet its franchise
agreement obligations. Hence, it is unlikely that the franchisee will be able to stay in
business. 

As per the Chapter XI of the Bankruptcy Code, the franchisor reorganises the debt
obligations and continues to operate as a going concern. By this reorganisation plan, a
franchisor works with its creditors in reorganising and continuing to meet at least some
of its franchise contract obligations. In both cases, the franchisor’s bankruptcy will likely
have a significant impact on the franchisee.

Franchise agreements
A Franchise Agreement is a legal agreement or a contract that binds a franchisor and a
franchisee. The agreement clearly explains what a franchisor expects from a franchisee,
how a franchisee operates the business, how much royalty shall be paid by the
franchisee, terms, and conditions to be followed during the time of their agreement.
There is no specific format for a franchise agreement as it can be purely based on the
negotiation between a franchisor and a franchisee. 

What shall be included in the franchise agreement

Franchisor and franchisee details

The clear details of the franchisor and a franchisee must be outlined before beginning
with the business, including the agreement.

Location
The franchisee has to select a location, in which the franchisee is going to start his
franchise business, and that must be approved by the franchisor before signing the
agreement.

Royalties
The agreement outlines the franchisor’s royalty structure, and a fixed percentage in the
total sales out of the franchise business.

Duration
It is a validity period of a franchise agreement until the franchisee has a right to continue
the business under the franchisor’s brand and trademark.  

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Initial fee and related matters

Matters related to initial fee, deposits, etc. That includes payment mode and due dates
to pay. This is purely negotiable before signing the agreement.

Trademark
This section helps the franchisee use the trademark of the franchisor business, and it will
also prohibit the franchisor from using this after the expiry of the agreement.

Training & support

The Franchisor must help train and support the franchisee’s staff, which will bring
uniformity among the entire business brand.

Operations
It completely deals with the responsibilities of the franchisee and the support extended
by the franchisor. That includes types of goods and services that a franchisee can offer,
which he exclusively buys from the franchisor etc.

Termination Mechanism
This section in the agreement deals with the termination of the franchise agreement. It
will also deal with the provisions if any party to the agreement breaches the terms,
which may include penalties and fines.

The agreement contains the details mentioned above of the business.

It is one of the best strategies for expanding the brand value, albeit, the franchisor has
both advantages and disadvantages in establishing the franchise business.

Advantages of franchise agreements

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A corporation typically uses franchising to enable its brand value as a global presence
for which it also allows sub-franchise. In consideration, the franchisee takes the
financial burden of maintaining the unit and pays the franchisor royalties for access to
its time-tested business model, brand name, and established market power.

The original business will expand its geographical reach, it can also minimise its
capital expenditure and increase the market share by opting for the franchise.

The franchise can be more profitable than any corporate-owned chain. Since the
franchisees are always motivated to maximise their profitability and held responsible
for their overheads, fewer overheads can make the franchise more profitable than the
chain stores.

The franchisor always keeps receiving royalties in the name of the overall percentage
of the gross sale, startup fee, monthly fee, and some other payments depending on
the agreement.

Disadvantages of franchise agreements

Many of us think only a franchisee bears all the expenses and risk, but, in reality, a
franchisor also bears the significant risk.

All a franchise requires is a sizable investment of both time and money, the franchisor
needs to plan a business development, flagship store, documentation work, recruiting
and training part, and marketing.

There cannot be a guarantee, even on a proven business, that the franchise could
become successful and bring profits.

There could be a chance of disagreement with their ideas and temperaments and that
might lead to significant changes.

If a franchisee refuses to cooperate or proves to be a poor choice in other ways, legal

action may be necessary and it can be both expensive as well as damaging to a
franchisor’s reputation. 

Documents required for franchise agreement

We do not have any specific documents required to execute a Franchise Agreement,
however, the franchisee must oblige to the fact that the franchisor holds the power to
delegate the franchisee and allied benefits to the franchisee. For the safer side, the
franchisee must scrutinise all the relevant documents relating to the agreement and
identity of the party. 

Conclusion
McDonald’s is one of the top money-making franchises, its iconic symbol of fast food,
sandwiches, burgers, chicken nuggets, and a wide variety of other signature food items
expands its brand value. It operates more than 37,000 restaurants all over the world.

In the event of a franchise, the franchisee must manage the network with at least two
individuals, one of whom must be the franchisee or another partner, shareholder, or a

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designated representative, and devote continuous efforts to developing, managing, and

operating the business. This means devoting sufficient time and resources to ensure
complete compliance with their obligations to the franchisor, their customers, and others.

Reference
https://www.upcounsel.com/franchise-definition-
government#:~:text=A%20franchise%20is%20a%20license%20or%20right%20given,fr

https://legal-dictionary.thefreedictionary.com/Government+Franchises 

https://www.reidellawfirm.com/franchise-bankruptcy/ 

https://heinonline.org/hol-cgi-bin/get_pdf.cgi?
handle=hein.journals/salar2018&section=23 

https://www.scconline.com/blog/post/2021/03/20/agreement/ 

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