A franchise agreement is a binding contract between a franchisor and a franchisee that defines their business relationship. It covers key aspects such as franchise rights, fees, royalties, agreement duration, territorial limits, training, operational standards, marketing, intellectual property protection, renewal, termination, dispute resolution, non-compete clauses, legal compliance, and exit terms. This ensures clarity and outlines the roles and responsibilities of both parties in running the business under the franchisor’s brand.
Laws Governing Franchise Agreements
The Finance Act, 1999, introduced the definition of a franchise agreement in India, now part of the Income Tax Act, 1961, and other laws. A franchise agreement allows the franchisee to:
Sell or manufacture goods
Provide services
Undertake processes associated with the franchisor
This applies whether or not a trademark or logo is used.
Payments to non-residents under such agreements fall under the Foreign Exchange Management Act, 1999 (FEMA).
Key laws governing franchise agreements in India include:
The Indian Contract Act, 1872: Covers contract formation, validity, and termination.
The Competition Act, 2002: Prohibits anti-competitive practices in franchising.
FEMA, 1999: Regulates foreign transactions and RBI permissions.
The Indian Trademark Act, 1999: Protects franchisors’ trademarks.
The Copyright Act, 1957: Safeguards franchisors’ copyrighted materials.
The Income Tax Act, 1961: Governs taxation on franchise fees and royalties.
How Franchise Agreements Work?
A franchise agreement is a legal contract between a franchisor (brand owner) and a franchisee (business operator). The franchisee pays an initial fee and ongoing royalties to use the franchisor’s brand, business model, and intellectual property.
Key Points:
Outlines the terms of the franchisor-franchisee relationship.
The franchisor grants rights to use its brand and provides training and support.
The franchisee pays upfront fees, royalties, and other charges.
The franchisee must follow the franchisor’s rules on operations, marketing, pricing, and quality control.
Agreements usually last several years, with renewal, termination, transfer, and non-compete terms.
Both parties have defined rights, duties, and legal remedies in case of breach.
Format of Franchise Agreement
How to Form a Franchise Agreement
To create a valid and effective franchise agreement in India, follow these key steps:
Understand Business Goals: Define the purpose of the franchise and what each party seeks to achieve.
Identify Parties: Clearly name and describe the franchisor and franchisee, including company registration details.
Define Franchise Terms: Mention the type of franchise, duration, territorial limits, fees, royalty structure, and responsibilities.
Legal Drafting: Engage professionals to draft the agreement as per applicable Indian laws and industry standards.
Include Key Clauses: Address intellectual property use, operational standards, training, advertising, termination, dispute resolution, and renewal rights.
Review & Negotiate: Both parties should carefully review the draft, seek legal advice, and negotiate terms if necessary.
Execution: Sign the agreement on stamp paper as per jurisdictional requirements and retain copies.
Register (if needed): Though not mandatory, registration of the franchise agreement adds credibility and legal strength.
Checklist for Franchise Agreement
Names and details of franchisor and franchisee
Clear description of the franchise business
Territorial exclusivity, if any
Term of agreement and renewal terms
Initial fees and ongoing royalty payments
Training and operational support
Marketing and branding guidelines
Intellectual property rights and usage
Termination conditions and post-termination obligations
Dispute resolution mechanism
Confidentiality and non-compete clauses
Types of Franchise Agreements
Product Franchise: Franchisee sells the franchisor’s products directly.
Manufacturing Franchise: Franchisee manufactures goods using the franchisor’s brand and process.
Business Format Franchise: Franchisee replicates the franchisor’s entire business model.
Job Franchise: Franchisee performs specific services using franchisor’s brand, often from home.
Investment Franchise: Franchisee invests and manages operations of large-scale units.
Conversion Franchise: Existing businesses adopt franchisor’s branding and systems.
Points to Check before Signing the Franchise Agreement
Understand your financial obligations (initial fee, royalties, marketing costs)
Read the operational rules and restrictions
Review the duration, renewal, and termination clauses
Check the training and support promised by the franchisor
Evaluate the exclusivity rights (territory or customers)
Ensure clarity on dispute resolution (mediation/arbitration)
Seek legal advice before finalising the agreement
Benefits of Franchise Agreement
Clarity in expectations and roles of franchisor and franchisee
Legal protection of brand and IP for franchisor
Helps franchisee operate business with fewer risks
Defines royalty structure and financial obligations
Outlines dispute resolution to avoid legal battles
Facilitates expansion with consistency and control
Royalty Fees for Franchise
Royalty fees are ongoing payments made by the franchisee to the franchisor. These can be:
Fixed Royalties: A set monthly/quarterly payment
Percentage Royalties: Based on gross revenue (e.g., 5% to 10%)
Tiered Royalties: Different rates for different revenue slabs
Minimum Royalty: A base amount payable even if sales are low
Royalty structures must be clearly defined to avoid disputes.
Key Elements of Franchise Agreement
Grant of franchise and license rights
Initial franchise fee and royalty payment terms
Territorial scope and exclusivity
Franchise duration and renewal conditions
Operational and training support from franchisor
Use of intellectual property and trademarks
Advertising and marketing obligations
Termination, default, and post-termination clauses
Dispute resolution mechanism
Confidentiality and non-compete conditions
Fundamental Provisions of Franchise Agreement
Franchise Grant: Type of franchise and scope of operations
Fee Structure: Entry fee, royalty, marketing fees, etc.
IP Protection: Usage rights of trademarks and copyrights
Training & Operations: Support provided to franchisee
Brand Guidelines: Standards for maintaining brand identity
Termination Clauses: Events and consequences of breach
Sample Clauses of Franchise Agreement
Grant of License: “Franchisor hereby grants a non-exclusive license to operate...”
Royalty Payment: “Franchisee shall pay a royalty of 6% of gross monthly revenue...”
Non-Compete: “Franchisee shall not operate a similar business for 2 years post-termination...”
Termination: “This agreement may be terminated by either party upon 30 days written notice...”
Dispute Resolution: “All disputes shall be resolved through arbitration in [City]...”
Parties Involved in Franchise Agreement
Franchisor: The owner of the brand and business system
Franchisee: The party who obtains rights to operate using the brand
Third Parties: Sometimes includes suppliers, sub-franchisees, or lenders (if referenced)
Typical Provisions of the Franchise Agreement
Licensing and IP usage rights
Initial and recurring fee structures
Support services (training, supply chain)
Performance expectations
Reporting and audit obligations
Legal compliance and branding standards
Franchise transferability
Exit strategy and buy-back clauses
Need for Franchise Agreement
Provides legal clarity and structure for both parties
Safeguards intellectual property and brand consistency
Reduces risk of disputes and miscommunication
Ensures compliance with Indian franchising laws
Outlines revenue sharing and operational responsibilities
Common Franchise Terms
Franchise Fee: Upfront cost for acquiring franchise rights
Royalty: Ongoing payment from franchisee to franchisor
Exclusivity: Rights over a specific geographic area
Operations Manual: Detailed guide for daily operations
Term: Duration of the agreement
Renewal: Extension terms after expiry
Territory: Geographical limits of the franchise
Trademark License: Rights to use the franchisor's branding
Why Sperso Filings?
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Franchise Agreement FAQs
A franchise agreement is a legally binding contract between a franchisor and a franchisee that outlines the terms, rights, and obligations of both parties in the franchise relationship.
Product Distribution Franchise, Business Format Franchise, Area Development Franchise, Master Franchise, Conversion Franchise, and Joint Venture Franchise.
Brand recognition, established business models, training and support from the franchisor, reduced risk, and marketing assistance.
The franchisee must stop using the franchisor’s brand, trademarks, and operational methods unless the agreement is renewed.
Apply to a franchisor, review the disclosure document, secure financing, and sign the agreement.
On breach of terms, fraud, insolvency, or mutual consent.
Yes, GST applies on franchise fees and royalties as they are services under GST law.
It defines the legal rights and duties between the franchisor and franchisee.
To safeguard both parties and ensure clarity on brand use, operations, and legal obligations.
It ensures brand consistency, defines obligations, and protects both parties legally.
Franchise fees, royalty payments, territory, training, and termination clauses.
Loss of independence, royalty costs, operational restrictions, and franchisor issues.
Indian Contract Act, Competition Act, Consumer Protection Act, and IP laws.
Grant of rights, territory, fees, training, IP, operations, and termination terms.
Franchisor owns the brand; franchisee runs the outlet under franchisor’s system.
No. Franchise agreements are governed by general contract and business laws.
Operational dependency, high fees, and possible damage to brand reputation.