What is a Franchise Agreement? Why Is It Important?

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A Franchise Agreement is a legal instrument that is binding on the franchisor and the franchisee. The agreement details the franchisor’s expectations from the franchisee, how the business must be operated, and so on.


A Franchise Agreement is a legal instrument that is binding on the franchisor and the franchisee. The agreement details the franchisor’s expectations from the franchisee, how the business must be operated, and so on. It is an agreement where the franchisor (business) consents to grant the enterprise name or company system to the franchisee (individual or entity). It creates the legal obligations to be fulfilled by both the franchisor and the franchisee, and also the clear expectation of the franchisor from the franchisee for running a mutually beneficial business.

A business where a parent company provides its business model and brand name to a third party is called a, franchisee. A franchise is owned and operated by individuals but branded and overseen by much larger multinational companies.


With the advent of globalisation and liberalisation, businesses have taken many business models for sustenance and prosper. Franchising has been one of the profitable business models that involve domestic players as well as foreign businesses. Franchising can be regulated by the negotiation, drafting, and agreement on the terms of the contract created by a mutual understanding of the franchisee and franchisor.

There are various types of franchising systems are in place, which include the dealer arrangement, marketing arrangement, trademark-usage arrangement, product distribution arrangement, manufacturing arrangement, etc.


Franchise agreements must be in line with the provision of the Indian Contract Act, 1872. Subject to this condition, franchises may include the disclosure requirements as a part of the contract.

Other laws include the Competition Act, 2002, the Income Tax Act, 1961, Consumer Protection Act, 1986, Arbitration and Conciliation Act, 1996, the Foreign Exchange Management Act, 1999, the Trademarks Act, 1999, the Patent Act, 1970 and the Copyright Act, 1957.

The business is the same all throughout the places where the franchise operates. For example, the quality of Reebok shoes is the same no matter from where you purchase them.

Examples of a franchise are Hard Rock Café, Johnny Rockets, KFC, Krispy Kreme Donuts, McDonald’s, Pinkberry, Pollo Tropical, Pizza Hut, Subway, and many other brands which you see in malls and big shopping complexes.


Below mentioned is a non-exhaustive list of provisions to be included in the agreement;

  • Term and renewal
  • Location
  • Site selection and development
  • Fees and Royalties
  • Franchise validity
  • Confidentiality clause
  • Duties of the parties
  • Proprietary Marks
  • Training support
  • Trademark
  • Default and termination
  • Advertising
  • Cancellation policies and renewal
  • Dispute resolution and jurisdiction
  • Exit Strategies
  • Post-term obligations


  • Choose brand carefully
  • Talk to previous franchise owner
  • Get professional help from lawyers
  • Analysis the stake
  • Get the business plan of the franchisee
  • Check the financial status of franchisee


  • Defines the relationship –

The agreement specifies the relationship between the franchisee and the franchisor, including both parties’ benefits and the restrictions.

  • Defines The Guidelines –

A franchise agreement permits the businessman (who is franchising his company) to define guidelines for the maintenance of quality related to different facets of the trade before onboarding the client and binding them in a franchise contract.

  • Better control to the franchisor –

The agreement ensures that the franchisor, as the business owner, has better control over the business’s operations.

  • Brand management –

The agreement provides scope for defining how the franchisee adopts the business and branding. The penalties for mismanagement or violation of business branding are defined to protect the brand’s image and reputation at all times.

  • Being a legally valid document, it binds all the parties binding and requires adherence to the proviso of the agreements.
  • Helps in enforcing the obligations set-out in the agreement in a mutually agreeable way.
  • They offer to enforce the terms of the contract without any misunderstandings that lead to a longstanding relationship between the parties.
  • Enables to avoid the complex and costly litigations in case of a dispute.
  • Serves as legally valid evidence, since the terms and conditions are meticulously drafted and agreed beforehand.
  • Meet the needs of the franchise brand’s customers, including making necessary changes as those customers’ needs evolve.
  • Protect the interests of the various stakeholders who have an interest in the brand, including the franchisor and its owners and the franchisees.

CONCLUSION A franchise agreement must be crafted to the mutual benefits of both the franchisor and the franchisee, which should also be valid to be enforced. Further, they should be crafted in a way that improves understanding and avoids costly disputes. There are various clauses to be included in the franchise agreements based on the business obligations, which also requires legal prowess to draft a comprehensive agreement.

Nashita Nazneen

Nashita Nazneen

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