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Different Types of Franchise Agreements


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: