Different Types of Franchise Agreements

Once the parties decide to establish a franchise, the next decision is deciding the structure and ownership of the franchise program. Based on the nature of understanding between the franchisor and franchisee, different types of franchise agreements could be entered into as follows:

Development Agreement

A development agreement is entered into if the franchisor and franchisee decide to develop a franchise outlet in a particular area. The development agreement gives the franchisee an exclusive right to open a store in a particular area within a particular period of time. Development agreement only provides the right to develop a store. Once development is complete, execute the franchise agreement to operate the store. Development agreements are usually executed to provide the franchisee with exclusivity to establish a store at a certain location, for a certain amount of time.

Franchise Agreement

After completing the development of the store, execute a franchise agreement. Franchise agreement provides the franchisee with the right to operate the store for a particular period of time. It is important to have exclusivity clauses in the franchise agreement to ensure no other stores of the same brand are opened/operated within a certain distance from the store for which franchise agreement is executed.

Some of the major elements in a franchise agreement are:

Initial fee
Initial investment
Product and/or services to be offered
Financing
Franchisor Obligations
Franchisee Obligations
Exclusivity
Trademark, Patent, Copyrights
Period of agreement
Franchisee fee
Termination

Sub-Franchise Agreement

A sub-franchise agreement between the franchisee and a third-party is to operate the franchise for a period of time for payment of a fee. Most franchisors require the franchisee to obtain the approval of the franchisor before entering into a sub-franchise agreement. Sub-franchise agreements are typically used when the franchisee is unable to operate the franchise on a full-time basis due to other commitments or to outsource the operations of the franchise.

Refer to the following articles for more information about franchising in India:

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Frequently Asked Questions

Common questions about Types of Franchise Agreements in Financial Services.

A development agreement is a contract entered into between a franchisor and a franchisee, granting the franchisee the exclusive right to open and operate a franchise outlet within a specific geographic area during a specified period. It serves as a preliminary agreement before executing the actual franchise agreement.

Some of the major elements found in a franchise agreement include the initial franchise fee, the franchisee's initial investment, the products or services to be offered, financing arrangements, obligations of both parties, exclusivity clauses, intellectual property rights, duration of the agreement, ongoing fees payable by the franchisee, and termination conditions.

An exclusivity clause in a franchise agreement ensures that the franchisor cannot open or permit another franchisee to operate a competing franchise outlet within a specified radius or geographic area around the franchisee's location for a certain period, thereby protecting the franchisee's business interests.

A sub-franchise agreement is a contract between a franchisee and a third party, allowing the third party to operate the franchise for a specified period in exchange for a fee. It is often used when the franchisee is unable to operate the franchise on a full-time basis due to other commitments or to outsource the franchise's operations.

Franchisors usually require their franchisees to obtain approval before entering into a sub-franchise agreement to maintain control over the franchise system, ensure that the sub-franchisee meets the franchisor's standards and requirements, and protect the brand's reputation and quality.

A development agreement grants the franchisee the right to develop and establish a franchise outlet within a specific area, while a franchise agreement governs the actual operation of the franchise once it has been developed and opened for business.

The duration of a franchise agreement can vary, but it is typically set for a fixed term, such as 5 or 10 years, with options for renewal or extension, subject to the franchisee's compliance with the agreement's terms and conditions.

Common obligations of a franchisee under a franchise agreement include paying initial and ongoing fees, adhering to the franchisor's operational standards and procedures, maintaining the quality of products or services, participating in training programs, and complying with marketing and advertising requirements set by the franchisor.

Most franchise agreements include provisions that allow either party to terminate the agreement under certain circumstances, such as a material breach of the agreement's terms, failure to meet performance standards, or insolvency. However, the specific termination conditions and procedures are outlined in the agreement.

Some advantages of entering into a franchise agreement include access to an established brand and business model, comprehensive training and support from the franchisor, proven operational systems and procedures, increased purchasing power and economies of scale, and the potential for higher success rates compared to starting an independent business.