Legal fundamentals of franchising

We all know ‘franchising’ is a proven model for multiplying company’s outlets and strengthening robust foothold across the country in a short span of time.  But, before you think of exploring this route for expansion, go through a checklist and then think of expanding or starting your entrepreneurial journey by way of franchise route. As we know that every sector is different and has its own set of challenges so it’s essential for prospective franchisees to consider some of the important legal issues that they should ordinarily be watchful for.

Research:  Go out and explore what’s in and out. Do extensive research about your market and evaluate potential of the industry or segment. Make a list of top-notch brands that are actually doing well and have years of expertise, visit the company’s franchise premises and interact with existing franchisees to know – how much profits they are fetching and support they get on regular basis from their franchisor. Before investing in a brand, assess return- on-investment (RoI), expected breakeven and find out through which retail formats the company/brand is present across the country.

Consult a legal advisor: Before investing in a brand, take help from legal or a franchise consultant. They provide expert advice on everything from selecting the right franchise and assisting in understanding and negotiating certain terms in the franchise agreement. One should also meet legal expert to discuss contract clauses with the franchisor. What a contract must contain and what should be avoided, royalty terms, marketing obligations, promotional offer restrictions such as on buy one, get one schemes, trade dress of the store and IP due diligence checks.

Brand/company’s repo in the industry: Verify whether the franchisor has adequate legal rights to license the brand name/logo/trademark to be used by the franchisee to sell the franchisor’s products? “Franchisees should also clearly understand the limitations to use the brand name/logo/trademark of the franchisor that is proposed to be licensed to the franchisee. Also verify if the franchisor has already granted similar rights in the territory and the scope and extend of such rights and its conflict, if any with the rights that the franchisee proposes to seek,” informs Seema Jhingan, Partner, Lex Counsel Law Offices.

Legal impediments: Franchisees must take proper legal advice to understand all contractual as well as legal impediments on their ability to take up and effectively operate a franchise. To add to this, an in-depth understanding of the applicable local/state laws would play a significant part in mapping the franchisees’ operational flexibility and growth plan.

Legal review: Proper review of franchise documentation is a must. For instance, the franchise must be aware of the non-compete and non-solicitation rights being sought by the franchisor. Similarly, attention must be paid to the extent, scope, term, territory and other restrictions imposed by the franchisor on the usage of the brand name, sale and pricing of the products and operation of the franchise in general.

Ongoing disputes: “Franchisees must be cognizant of any proceedings that the franchisor have, may be that could impact the franchisee’s ability to effectively operate the franchise (for instance, any IP disputes involving the brand name/logo/trademark under license or any payment and product related proceedings with the other franchisees),” adds Seema Jhingan.

Delineation of responsibilities: The responsibilities of the franchisee and the franchisor must be clearly spelled out and agreed. Any overlapping responsibilities or ‘good faith’ actions of either party must be carefully dealt with. For instance, clarity on roles and responsibilities and mapping of expectations of the parties is a must.
Consideration: Among other things, the parties’ understanding vis-à-vis license fees and royalties must be unambiguous, including with respect to its quantum, frequency, default, tax liability, etc.

Exit options: Franchisees must ensure to address the exit options available to them under the franchise arrangement and post termination inventory handling issues.