Understanding the legal know-how of Franchise business model

With the Franchise industry in India being over $51 billion, we see a growth in Franchise opportunities driven by increasing consumer spending from $1.5 trillion (2022) to about $6 trillion by 2030. India already has over 1.7 lakh Franchise outlets; the number will grow if the economic conditions do not stagnate again. With this growing number, it becomes crucial to understand the legal know-how of the franchise business model to ensure sound practice.

What is a Franchise business?

Franchising is a business whereby the Franchisor expands the brand’s footprint to a network of Franchisees. Franchising is about capturing new markets in a competitive environment with fewer risks. It’s vital that the business model, i.e the products, systems, or services, are scalable and teachable to new Franchisees. Start-up assistance, training, and the rights to trade under a brand name form part of the initial costs for the Franchisee outlet. Both franchisors and franchisees benefit from this business model. The franchisor can grow the business without opening multiple outlets, hiring staff, and managing premises/branches while the Franchisee is allowed to make good use of the franchisor’s expertise and experience.

Impact of Covid-19

Until 2019, the Indian Franchise business market was steadily growing. Factors such as the enactment of the Insolvency and Bankruptcy Code, 2017, effective integration of state and central taxes with the implementation of the Central Goods and Services Tax Act, 2017, for example, were responsible for flexible conduct of business.

We observed that in response to the covid-19 crisis, the Franchise businesses could make prompt adjustments to survive the pandemic compared to other traditional businesses. Franchisors adapted quickly by making business or marketing strategy changes in a single go even though operations were spread multi-city.

In the post-pandemic period, we see consistent improvement in existing businesses and the creation of new Franchises. Restaurants, Lifestyles, Wellness, Health aids, Services, etc are considered the most popular sectors for Franchise business arrangements.

Legal framework

Success is not just about a brand’s apt solution to consumers’ problems or the creation of optimal processes. An enforceable franchising agreement covering the essentials of franchising defines the relationship between the Franchisor and Franchisee. It is different from that between principal and agent, client and contractor, employee and employer, supplier and distributor, and joint ventures or partners; hence needs a sound legal framework for successful operation.

The Franchising Agreement

The Franchise agreement used by the Franchisor is to apply to an entity acting as its exclusive Franchisee within a specified area as recorded in the document. All the terms and conditions governing the legal relationship between the Franchisor and Franchisees and the security of rights to access the intellectual property, training, and product marketing support are well-established. It also ensures control over how the Franchisee operates its business, markets and sells the products and services, and oversees the quality and standards maintained by the Franchised business.

The legal relationship between the Franchisor and Franchisee

There is no ‘law of franchising’ or regulation in India specific to franchising. Parties need to ensure that their Franchise agreement’s content covers as fully as possible the legal and commercial terms of their relationship and the practicalities of operating the Franchised business.

The license of a Franchise

The license of a Franchise entails assignments of rights by the Franchisor of its trademarks, names, copyright material, confidential information, and other intellectual property in favor of the Franchisee. The Franchise agreement needs to decide what intellectual property rights are granted and used by the Franchisee.

Anti-competitive agreements

The laws regulating anti-competitive agreements and activities apply to regulate franchising, but the law also permits restrictive provisions and practices about Franchised operations if they do not go beyond certain bounds.

Standard Operating Procedure

Many franchisors provide the Franchise agreement with Standard Operating procedures (SOPs). SOPs work like a manual for successful day-to-day operations. They cover standard protocol, details of process or procedure required before and during the sale of the products or rendering of services, insurance requirements, and safety measures to ensure mutual, unambiguous agreement.

Current developments

Post pandemic, the Franchise business model proved to be the leading employment generator with rapid business openings, faster hiring, and more stable performance than independent businesses. The pandemic made us understand that Franchise business models have the potential to resolve challenges through agile shifts in business operations. By 2023, the franchise industry is expected to account for about 5% of the Indian GDP, making franchise-based setups a crucial part of our economy. With a fail rate lower than start-ups and a success percentage of 8% in comparison to a corporation, franchise businesses have a high potential to maximize returns on investment due to their low-risk, low-cost business models.

(The writer is Founding Partner at Vis Legis Law Practice, Advocates)

Source link

Spread the word!

Leave a Comment

Your email address will not be published. Required fields are marked *