Franchising may mean different to different people. But in simpler words, it is the legal phenomenon of granting of specific rights by the franchisor to the franchisee in exchange of money. Then, the franchisee has the authority to exercise those particular rights under the conduct of the franchisor.
What is franchising?
Franchising is a form of business or license where a franchisor offers either a business idea or a proper franchise business to a franchisee in return of the money. The franchisee, then, adopts the business and its methodology and runs it under the name of the franchisor. The franchisee has the authority to market products under the trademark, trade names, and service marks of the franchisor for a particular period. Usually, the franchisee is accountable to pay an up-front fee along with a sales’ percentage.
Characteristics of a Franchise Arrangement
- The franchisor grants specific rights to the franchisee in return of a money
- Competitive edge
- Franchisor authorizes the franchisee to make use of a trademark, logos, patents, trade names
Few Things to Take Into Consideration Before Starting a Franchise Business
- Starting a franchise business should be a decision after a careful analysis; it is not a product for impulse buying.
- There should be the concept of balance sheets for realistic expectations.
- There should be a long-term and in-depth analysis of every aspect.
Advantages of a Franchise Business
- It has the potential of filling a particular need existing in the market in a better way
- Self-employment increases
- Employment rates also increase, ultimately contributing to the country’s economy
- Increase in revenue
What is licensing?
Licensing is where a licensor grants specific rights to a licensee to make use of intellectual property, brand, or product in return of royalty. The main difference between franchising and licensing is the control of a franchisor over a franchisee.
Difference between Franchising and Licensing
|Franchising is a business arrangement where a franchisor grants rights to a franchisee to conduct business operations for a fee.||Licensing is an arrangement where a licensor grants licensee the rights to make use of company’s intellectual property in exchange of royalty fee.|
|It is governed by franchising regulations or company laws.|
|It is governed by contract laws.|
|Registration is mandatory.||Registration is not mandatory.|
|Training and development is provided.||Training and development is not provided.|
|Franchisor has considerate amount of power over the franchise business.||Licensor has control over the use of intellectual property, not on the business.|
|It requires continuous assistance.||Rights and property is transferred only once.|
|The amount of fees is not negotiable hence standard.||The amount of fees is negotiable.|
A franchise agreement is the foundation of the relationship between a franchisor and franchisee. It involves all the rights and obligations of each of the parties. There is a requirement to either attach a sample agreement with the disclosure statement or present it as a separate document. Whatever way you choose, prospective franchisees must receive the agreement five days before the signature. The next step is to get it reviewed by a relevant lawyer.
The agreements will have all the obligations regarding operations of the business; cost and details of training and support; territorial rights; duration and renewal rights; investment details; process of dealing with trademarks, trade secrets and patents; royalties and fees; procedure of selling and transferring of the business; marketing and advertising policies; termination policies; cancellation; attorney fees, and dispute and conflict settlements.
The franchise agreement doesn’t allow any form of biasness or personal interests. This means that a franchisor must follow a standard pattern for each prospective franchisee. If there is no regulation involved, it is very important to state every tiny bit of detail in the contract.
The franchise contract must state the following points clearly:
- Responsibilities, obligations and rights of both the franchisor and franchisee
- Termination policies
- Fees structure and period
- Consequences in case of termination
A few more things to keep in mind is that the contract should include franchisee’s objectives and provision. And what happens if the franchisee dies or becomes debilitated. We also recommend including what happens if a franchisee wants to sell the business during the agreement.
For a franchisee, a franchise business is a form of investments, and for a franchisor, it is a source of income. If something goes wrong in the contract, the franchisor has to bear the loss of his entire network. Once the agreement has been signed by the parties, they are bound and must act accordingly.