The Perspectives of Franchising

8/6/2019 The Perspectives of Franchising

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The Perspectives Of Franchising

The Perspectives Of Franchising

In the epoch of internationalization, the entire world became a universal village. The next

result of GATT (General Agreement on Tariff and Trade) and WTO (World Trade

Organisation) is the globalization of commercial activities. The need of the hour is to expand

the business activities within the country and also to penetrate the overseas market. This is

possible only through the concept of franchising. There was a boom in 1950s and 1960s in

USA., and in Europe in the franchising industry. The Multinational Corporations of the first

world spread their business tentacles by adopting the concept of franchising. It is impossible

for a single company located to one place to distribute its products throughout the world

effectively.

An imperative part which determines the viability of any franchising business in a country

relates to the class of consumers it caters to. India is a multi cultural country with thesecond largest population in the world. Indian consumers have experienced the standard of

services offered overseas and have sufficient exposure through media, which has further

fuelled their expectations. They now want to avail of the benefits that a foreign franchisor

can generate for them.

One of the primary factors which control the success of franchising business in an emerging

like India is the ability of a foreign franchisor to identify and seize the appropriate moment

when the business environment is favourable and reap it rewards. Home to over a billion

people, including a flourishing class of urban consumers possessing considerable amounts of

disposable income together with the continued growth of the economy have strengthened

Indias claim to be viable and beneficial destination for a foreign franchisor.

There is no specific legislation1 regulating franchise arrangements in India, but there are

various laws which affect the relationship between the franchisers an franchisees, including

intellectual property laws, taxation, labour regulations, competition laws, property and

exchange control. A deep understanding of the laws related to the business of franchising is

imperative for a foreign franchisor which is planning a foray into the Indian market.

The term franchise has its origin in the French word affranchir which means to to free. In

its simplest terms a franchise can be considered a licence from owner of trade mark or trade

name permitting another to sell a product or service under that name or mark. The

usefulness of franchising lies in the fact that it helps the mega corporations to expand their

business and popularize their brand names without investing large amounts of money.

These corporations act as franchisers. It is the local dealer who acts as a franchisee and

operates at a lessor cost by using his local market knowledge. But this franchisee runs the

business with the help of financial and local market knowledge. But this franchisee runs the

business with the help of financial and technical knowledge given to him by the franchiser.
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The franchisee will be able to do business successfully without risks by utilizing the good-will

attached to the brand name of the franchiser.

Definition of Franchise: A form of business organization in which a firm which already has

a successful product or service (the franchisor) enters into a continuing contractual

relationship with other businesses (franchisees) operating under the franchisor's trade nameand usually with the franchisor's guidance, in exchange for a fee2.

Franchising means paying some one for his business strategy, marketing strategy,

operations strategy and use of his brand name.

International Franchise Association (IFA) of America defined the expression:

A franchising operation is a contractual relationship between the franchiser and franchisee

in which the franchiser offers or is obligated to maintain a continuing interest in the

business of the franchisee in such area as know-how and training; wherein the franchisee

operates under a common trade name, format and procedure owned and controlled by thefranchiser, and in which the franchisee has or will make a substantial capital investment in

his business from his own resources3.

Contrary to popular belief, franchising is not an American invention - it first emerged in

Britain during the Middle Ages when certain high church officials would pay a lump sum to

the Government and would agree to provide continuing personal support and services in

return' for the right (i.e. the franchise) to collect local taxes.

Who is Franchiser and Franchisee?

The one who grants a franchise is known as franchiser. Franchiser is the owner of the

franchised system. It is the proprietor of the concept of that business and the brand name.

It has the right to grant licence for the establishment of franchises to other parties relating

to its business.

The one who granted a franchise is known as franchisee. Franchisee is the entity to which

the franchiser grants licence to carry on business, by permitting it to use the know-how and

brand name. Here the franchiser permits the entity known as franchisee to establish a

franchise of his business.

Then, What is Franchise Agreement?

The franchise agreement4 is the cornerstone document of the franchisee--franchiser

relationship. It is this document that is legally binding on both parties, laying out the rights

and obligations of each. A sample agreement may either be attached to the disclosure

statement or presented separately. Either way, you are entitled to receive it as a

prospective franchisee five business days before signature. You should have it reviewed by

a lawyer familiar with franchise matters--especially since most agreements are extremely
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one-sided in favor of the franchiser. No one should enter into a franchise and expect to have

an evenly drawn contract.

The agreement will contain provisions covering, in considerable detail, the obligations of the

franchiser (the company) and franchisee (you) regarding operating the business; the

training and operational support the franchiser will provide (and at what cost); yourterritory and any exclusivity; the initial duration of the franchise and any renewal rights;

how much you must invest; how you must deal with things such as trademarks, patents and

signs; what royalties and service fees you will pay; tax issues; what happens if you should

want to sell or transfer the franchise; advertising policies; franchisee termination issues;

settlement of disputes; by the company, operating practices, cancellation, and attorney

fees.

There is no standard form of franchise agreement because the terms, conditions, and the

methods of operations of various franchises vary widely depending on the type of business

involved. For example, franchises for printing, employment agencies, and automotive

products will differ from the franchises for fast food service, convenience stores, or clothing.

Historical growth of Franchising:- Modern Franchising is an American idea that has

become the most enduring and successful business concept in the history of the world. But

this franchising had its rudimentary origins in the past. The Roman Catholic church

franchised the right to run a parish to the local clergy on the condition that a part of tithes

(church taxes) collected by them must be given to Rome. In the same way King John of

England granted franchises to his barons to collect taxes.

During the time of feudalism in the middle ages in Europe, the peasant slaves were given

rights to become freemen by the land owners subject to the fee paid to them.

In the modern times, the first classic instance of franchising relates to Singer sewing

machine company. Immediately after civil war in the United States of America, Singer

Company was mass producing the sewing machines. But the company allowed the

financially sound to distribute and service those machines. So the company allowed the

financially sound independent persons to have the rights regarding selling and servicing of

singer machines within the specified areas for a consideration. The scheme was so

successful, immediately it was emulated by the general motors and other companies of

Automobile Industry and achieved instant success. Later in 1950s the same concept of

franchising was adopted by hundreds of American and European companies to the extent

establishing franchises all over the world to great success.

As we discussed earlier, America was the mother of the modern concept of franchising

where 50% of all retail sales are through franchise outlets. At present all most all the blue

chip corporations of the world got the franchise out lets across the globe in so many

countries. Franchising at present is common in all types of industries and services like fast

food centres, hotels, fashion industry, financial services, textile industry, watches, courier

services, computer services, publishing industry, automobiles etc. Some of the most famous


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corporations that utilize the concept of franchising far expanding their commercial activities

are: Mc. Donalds, K.F.C., Holiday Inn Worldwide, Pizza Hut Burger king etc.

Concept of Franchising and its nature: The franchising concept can be understood as licence

type transactions. In India, all the contracts come under the purview of the Indian Contract

Act, 1872, which is based mainly on the English Law Principles. The agreement to thefranchise is a standard printed agreement which deals with rights and obligations of the

licensor and licensee.

Types of franchisees:-

There are many types of franchisees:

(a) Unit franchisee:- In this franchiser grants right to the franchisee to operate one unit or

outlet of the franchised business. Some unit franchisees operate several units in a City or in

a State.

(b) Regional franchisee:- Here the franchiser grants right to the franchisee to operate the

business in the whole of a region.

(c) Master Franchisee5 - The individual or company who owns the exclusive rights to develop

a specific continent for the franchising company.

Legal aspects in Franchising: The laws relating to franchising are excellent so far as

Western Countries are concerned. In India the concept of franchising is in its nascent

stages. So the rights and liabilities of the franchiser and the franchisee have not been dealt

with elaborately under any law. Generally the law of contracts is applicable to franchise

agreements. The franchise agreement must be lawful and not against the public policy in

India. The franchising agreement is considered licensing contract in India with a single

difference relating to the territorial operation of the business. Some of the laws that

indirectly cover the area of franchising in India are-

(1) Consumer Protection Law in India:- The Consumer Protection Act, 1986 is the most

relevant enactment to the common law who is the consumer of the franchised product. The

Act makes liable various categories of persons. They are manufacturers, assemblers,

distributors, wholesalers, retailers and packers. It is also applicable to installers, erectors,

and repairers of goods. So the franchiser or the franchisee of goods can fall into this

category. When the product purchased by the consumer from a franchise outlet is not of thesame quality or standard as that provided by the franchiser, he has got the remedy under

the Consumer Protection Act. Sometimes, the product manufactured or produced by the

franchisee under the supervision of the franchiser may cause personal injury to the

consumers of the products or may cause damage to the properties of the consumers, in that

case also the Consumer Protection Act helps the consumers to get compensation for that

personal injury or loss of property. The Consumer Protection Act, 1986 has got substantial

impact on the franchising system in India.
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(2) Intellectual Property law and franchising in India:- Intellectual Property rights should be

protected very carefully in any country so as to make the franchising system successful.

Otherwise when the franchiser enters into new territory with its products, its product may

be copied, brand name may be misused which in turn affects good will of the franchiser. In

the concept of franchising, there is transfer of know-how by the franchiser to the franchisee,

which should be protected, otherwise it results in loss of economy and reputation of thefranchiser.

(3) The Trade Marks Act, 1999:- This Act has been enacted to provide for the registration

and better protection of trade marks and for the prevention of the use of fraudulent marks

on merchandise. The best way to protect a trademark must get it registered property in

India.

(4) The Designs Act, 2000:- This enactment is intended to protect the proprietors of novel

and original designs. The Act further makes it possible for the proprietors to enforce their

right against the violators. For the existence of the franchise system, the foundation is the

design and good will of the franchiser. This legislation helps the franchiser to protect his

exact design and goodwill.

(5) The Copyright Act, 1957:- The Copy right Act can be used successfully by the franchiser

when he wishes to protect his franchising manual. The manual contains the entire technique

of running the franchise business. The manual should not be used unauthorisedly or

improperly by any other person without having the permission of the franchiser as it

amounts to violation of copy right being held by the franchiser.

(6) Labour Laws and franchising:- There are various enactments concerning labourers in

India. All franchising contracts are amenable to labour laws in India. Labour laws govern the

day-to-day conditions of employment in a franchising system. When a franchise outlet is

closed or shut down, then the labour laws play a vital role in determining the compensation

to be paid to the employees of that franchise outlet by the master franchisee, franchiser or

franchisee.

The need of the hour6 is for the foreign franchisors to realize the unparalleled prospects

which franchising in India can offer to the expansion of their businesses. Careful planning

and evaluation of the Indian market by foreign franchisors combined with an increase in the

confidence in the entrepreneurial skills of the Indian businessmen will provide them a

platform to gain entry into the Indian market, raising the awareness of their products and

services. The business and social climate in India is ready for foreign franchisors and theymust awake up to the fact that now the time is right. Thus as a quick conclusion,

prospective franchise buyers should be careful in doing their market research and manage

their financial liquidity well.

1 Srijoy Das, Kartik Srivastava, FRANCHISING IN INDIA: THE TIME IS RIGHT, availableathttp://www.intelproplaw.com/Articles/files/Franchising%20in%20India%20-%20The

%20Time%20is%20Right.pdf(Last Visited on June 17, 2010).
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2 Franchise, Definition availableathttp://www.investorwords.com/2078/franchise.html(Last Visited on June 17, 2010).

3 Theoretical Info: Basic Definitions, ABLES Franchisee Program, available

athttp://www.ableseducations.com/BOFranchisee.asp(Last Visited on June 17, 2010).

4 Franchise Law, available athttp://business-law.freeadvice.com/franchise_law/agreement_franchise.htm (Last Visited on June 17,

2010).

5 Franchise Glossary, available

athttp://www.youfranchise.com/franchiseglossary.html(Last Visited on June 17, 2010).

6 Srijoy Das, Kartik Srivastava, FRANCHISING IN INDIA: THE TIME IS RIGHT, available

athttp://www.intelproplaw.com/Articles/files/Franchising%20in%20India%20-%20The%20Time%20is%20Right.pdf(Last Visited on June 17, 2010).

Total shows: 114

Author: V.G.Ranganath working as an Assistant Professor, Padala Rama Reddi Law College,Hyderabad and Research Scholar(part-time), Dr.B.R.Ambedkar College of Law, AndhraUniversity, Visakhapatnam.Rating: 2.93
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The Perspectives of Franchising