contract of franchise

8/8/2019 Contract of Franchise

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Today, India is one of the biggest emerging markets for various goods and services, ranging

from bare necessities to expensive luxuries. Until 1991 due to the archaic Foreign Exchange

Regulation Act, 1973 (FERA), almost all sectors of goods and services relating to the consumer

markets in India were secure from the grasp of foreign investors. After the repeal of FERA and

the coming into force of the Foreign Exchange Management Act, 1999 (FEMA), foreign investorsfound their passage into India with rules for entry becoming far more favourable. Today, a

convenient medium of entry by foreign companies into the Indian market is franchising.

Franchising also exists as a successful business module for local companies in India within

various sectors.

The United States of America stands at the forefront of the franchise boom. Today, the legal

environment in the United States is highly conducive to the healthy growth and evolution of

franchising. With more than 50% of total retail businesses in the United States, 45% in Canada

and 26% in Australia choosing a franchise model for expansion the impact of franchising on

retail industries across the globe is considerable. To foster the rapid and sustained growth that

this channel brings it is critical that laws to regulate the franchising business exist.

However, there are no laws enacted solely for the purpose of regulating the growing business

of franchising in India, even though many nations across the world have enacted such laws. The

result is that when franchisors enter India they are governed by a number of different statutes

and codes rather than a single comprehensive enactment.

Franchise Laws across the Globe

There are many countries which have developed comprehensive legislation to cover franchising

in their respective dominions. At the federal level in the United States, the Federal Trade

Commission s Rules on Disclosure Requirements and Prohibitions Concerning Franchising and

Business Opportunity Ventures (1979) regulate the information a franchisor is required to

supply the prospective franchisee in order to enable the franchisee to make an informed

decision on the prospects of venturing into the business. The North American Security

Administration Association (NASSA) has adopted a Uniform Franchise Offering Circular (UFOC)

which delineates the information required to be disclosed to a prospective franchisee.

Disclosure requirements under franchising are well-defined in the USA.

In 2000, the Ontario Legislature in Canada adopted the Arthur Wishart Act which deals

comprehensively with disclosure requirements as well as important aspects of the franchisee-

franchisor relationship such as fair dealing by each party to a franchise agreement as regards its

performance and enforcement, and the right of action for damages for breach of the duty of



fair dealing.

In the United Kingdom, there exists no operative franchise-related legislation. However

different aspects are governed by norms laid down by the British Franchise Association (BFA),

the regulatory body of the franchise industry in the United Kingdom. These include a code of ethical conduct, disciplinary procedure, complaints procedure and appeals procedure.

The Australian government has adopted a mandatory code of conduct and has also modified

the Trade Practice Act 1974 to provide for franchising. The new code imposes comprehensive

disclosure requirements and provides for mandatory mediation of franchising disputes and

minimum standards for franchise agreements including, inter alia, a cooling period, refrain from

seeking from a franchisee a general release liability, disclosing material facts and refrain from

unreasonably withholding consent to transfer of the business.

In April 2002, the Japan Fair Trade Commission (JFTC), the competition authority of Japan,

published new guidelines on franchising. These guidelines contain three parts - a general

description of franchising, provisions for the disclosure of necessary information (such as details

of the assistance to be offered to franchisees, the nature, amount and conditions of repayment,

if any, of the fee to be paid at the time of entering into a franchise agreement, etc.) at the time

of the offer of a franchise and a part on vertical restraints between a franchisor and its

franchisees. Under the guidelines, the failure to provide necessary information shall constitute

deceptive customer inducement, which is considered an unfair trade practice.

On 31 December 2004 the Ministry of Commerce of the Peoples Republic of China

promulgated the Measures for the Regulation of Commercial Franchises which became the sole

legal framework for franchising in China. The measures became operative on 1 February 2005

and provide detailed regulations for franchising, comprising of 42 articles over nine chapters

covering a wide span of areas from the franchise agreement to disclosure requirements, special

rules for foreign invested enterprises and legal liabilities.

Need for a Franchise Law in India

A healthy legal environment is of great importance for franchising and should include provisions

pertaining to all areas that fall within the ambit of franchising. This includes, inter alia,

commercial law relating to contracts and joint ventures and intellectual property law for

protection of trade marks and know-how. Franchise arrangements are subject to an array of

laws and regulations in addition to those regulating commercial contracts and intellectual

property rights. There are no specific laws governing franchising in India. As a result a franchise



agreement may be governed by different laws.

Primarily a franchise agreement is a contract between the franchisor and the franchisee. The

first law which comes into the picture is the Contract Act 1872 which governs contracts in India.

A franchise agreement will be governed by the Indian Contract Act, 1872 and the Specific Relief Act, 1963 which provides for both specific enforcement of covenants in a contract and

remedies in the form of damages for breach of contract. If a party to the franchise agreement

commits a breach of contract, the aggrieved party has the option to initiate a suit for specific

performance in Indian courts and apply for relief in the form of a temporary or permanent

injunction, which may be granted at the discretion of the court considering the balance of

convenience and the interests of justice. An order granting or rejecting an injunction may be

appealed by an aggrieved party.

Laws relating to taxation, property laws, insurance law and labour laws also apply to franchise

transactions. Additionally, laws and regulations applying to specific sectors of goods and

services will also apply depending on the franchised.

The following are the reasons why a comprehensive franchise law is required in India:

Application of Multiple Legislation

A well-defined legal structure is indispensable for the effective functioning of any business

operation. The international business environment demands a well-defined suitable legislation

that is complete in all respects. The lack of a comprehensive legislation on franchising in India

leads to the applicability of multiple laws to a franchise

transaction.

This poses the following problems:

Complexities: Parties to a contract normally prefer agreements with a simple approach and

encompassing all the required law procedures and rules required to be complied with. However

the application of different laws to one agreement makes it complex to decide various issues

arising from the agreement.

Ambiguities: Due to the necessary application of multiple legislation, ambiguities are created as

to certain issues. For example, a franchisor would imagine that a certain issue is the

franchisees responsibility under one law, whereas the franchisee would think the opposite

based on a different law.

Time-Consuming: Referring to multiple laws consumes a lot of time at the initial stages of a

transaction as well as other points of time when the agreement is sought to be enforced. This



proves to be detrimental to the smooth functioning of franchising operations in India and also

makes time-bound operations involving new enterprises difficult.

Absence of Disclosure Requirements

Countries with specific franchising legislation make it imperative for parties to a franchise

agreement to disclose certain factual information pertaining to the business of the parties. Thisensures transparency and facilitates an informed decision. A franchisor should be required, by

law, to make certain disclosure to the prospective franchisee wherein he is supposed to reveal

detailed information regarding himself, his litigation and bankruptcy history, his financial

position, the facilities he offers etc. In India, in the absence of effective disclosure norms, a

prospective franchisee is rendered helpless as the franchisor is under no statutory obligations

to make disclosures.

In the absence of a specific statute governing the franchise agreement, the franchisor refrains

from providing any information that is likely to prejudice or make a franchisee reconsider the

business proposition of the franchisor. The lack of proper disclosure requirements provides a

golden opportunity to a franchisor to abuse his position of importance as he is virtually under

no statutory obligation to make the requisite disclosure.

Applicability of Laws of other Countries

Normally, the absence of franchise laws enables foreign franchisors to make the laws of their

own country applicable to the agreements entered into with the franchisees in India. The same

is the case with franchisors who enter into franchising agreements with franchisees from other

countries. This proves to be an additional burden on the parties, particularly the franchisee.

Lack of Proper Format for Franchising Agreements

Due to lack of a specific format, franchisors from other countries draft agreements which are in

the same format as is approved or followed in their countries. Such agreements are made to

suit the specific environment of their respective countries and hence are not suitable for Indian

environment.

Liability of Parties Uncertain

Due to the lack of specific legislation, the liability of either party is either determined by the

agreements entered into between them or on the basis of general prevailing law. The liability

clause is different in different countries, and this leads to a great discrepancy among the courts

which try such disputes on liabilities.

The Central Government is currently considering a franchise law aimed at fast resolution of

disputes; the proposal is expected to be placed before a sub-committee of the National



Development Council. The aforesaid problems surrounding franchising in India necessitate the

enactment of a specific legislation pertaining to franchising in India and providing for the gamut

of activities that franchising encompasses. A special franchise law would greatly accelerate

dispute resolutions and fortify the Indian retail industry.

The Franchise Association of India is the country peak industry body and franchise advisory

committed to strengthening and promoting the best practices in franchising. Franchise

Association of India members are businesses and service providers united by their common

concerns for the wellbeing of the franchise marketplace. Franchise means an agreement by

which

I ) franchisee is granted representational right to sell or manufacture goods or to provide

service or undertake any process identified with franchisor, whether or not a trade mark,

service mark, trade name or logo or any such symbol as the case may be, is involved;

ii) the franchisor provided concepts of business operation to franchisee, including know

how, method of operation, managerial expertise, marketing technique or training and

standards of quality control except passing on the ownership of all know-how to franchisee.

iii) The franchisee is required to pay to the franchisor, directly or indirectly a fee;

iv) The franchisee is under an obligation not to engage in selling or providing similar goods or

services or process identified with any oilier person.

The above definition effective from 01.07.2003 .was amended on 16.06.2005 as follows:

Francliise means an agreement by which the franchisee is granted representational right to sell

or manufacture goods or to provide service or undertake any process identified with franchisor,

whether or not a trade mark, service mark, trade name or logo or any such symbol as the case

may be, is involved.

What is Franchising?

Franchising in general means granting of certain rights by one party (the franchisor) to another

(the franchisee) in return for a sum of money. The franchisee then exercises those rights under

the guidance of the franchisor.

The above definition is a very general in its nature and encompasses many different forms of

licensing arrangements. The business format of franchising, being the important one, can be

defined as the contractual license granted by one person (the franchisor) to another (the

franchisee) which:



y Permits or requires the franchisee to carry on a particular business using the franchisors

know-how under the franchisors brand as an independent business;

y Allows the franchisor to exercise continuing control over the manner in which the

franchisee carries on the franchised business;

y Obliges the franchisor to provide the franchisee with ongoing support in carrying on the

franchised business.

As a commercial matter, the agreement inevitably requires the franchisee periodically during

the period of the franchise to pay to the franchisor sums of money in consideration for the

franchise and / or goods and / or services provided by the franchisor to the franchisee.

The International Franchise Association (IFA) defines franchising as a continuing relationship in

which the franchisor provides licensed privilege to do business, plus assistance in organizing,

training, merchandising and management in return for a consideration from the franchisee.

Who is a Franchisor?

He is the owner of the franchised system. It owns the know-how of the concept and the brand

name. It grants franchises to third parties.

Who is the Franchisee?

He is the one who has been granted the right by the franchisor to carry on the business using

the franchisors know-how and the brand name. Now, depending on the rights granted,

franchisees can be classified into:

1. Unit Franchisee this is the simplest and most common form of franchising. This

franchisee is granted the right to operate one unit or outlet of the franchised business.

2. Master Franchisee He is generally granted the right to a substantial territory. It will then

grant unit franchises to unit franchisees throughout the territory. The Master Franchisee needs

to have sufficient drive and resource to fully exploit the territory and control the unit

franchisees territory.

3. Regional Franchisee Ina geographically large area a franchisor, or a Master Franchiseemay decide that it is commercially appropriate to further divide the territory up with separate

regions and grant a Master Franchise for each separate region. These franchises are known as

regional franchises or sometimes area franchises.



4. Multiple Franchises Some unit franchisees operate not just one unit, but several. These

are referred to as multiple franchises and usually have a large number of individual unit

franchise arrangements one for each unit.

5. Developers Large Corporations sometimes prefer to exploit their territory by opening

outlets themselves. These are known as developers. They have a single developer agreement,

which allows them to open many units. These are pilot operations so that they become fully

familiar with the business at an operational level and can localize it so as to improve its chances

of success.

What is Franchise fee?

A fee paid by franchisee to a franchiser. US standard accounting practice requires that franchise

fee revenue should be recognized when all material service or conditions relating to the sale

have been substantially performed or satisfied by the franchiser.

Basic Elements of Franchising

Thus, we can sum up the basic elements of franchising as under:

1. An entrepreneur (franchisor) has developed a system of doing business, which works and

decides to grant to another entrepreneur (franchisee) the right to use the system.

2. The two entrepreneurs are legally and financially independent enterprises.

3. The granting of the right to use the franchise system involves the right of the franchisee to

use the franchisors intellectual and industrial property, know-how, business and technical

methods, procedural system and other intellectual property rights.

4. The franchisee in exchange undertakes to follow the methods elaborated by the franchisor

and to pay an entrance fee and / or royalties.

5. The franchisor retains the right of control over the performance of the franchise.

6. The franchisor undertakes to provide the franchisee with training and on-going assistance.

Some general Issues on franchising

Why is franchising growing?

Franchising is one of the worlds fastest growing and most lucrative industries. Franchise

businesses will be turning over an estimated $ 1 trillion.



Franchising permits businesses to grow more rapidly than any other method. By increasing the

efficiency by which goods and services are distributed, it brings impressive gains to any

economy. On a cultural level, franchising is one of the few developments that generate

employment, earnings and entrepreneurship at the same time. It disseminates ownership rights

and decision-making power to thousands of small-unit operators. For developing countries, or

countries shifting to a market economy, franchising has the effect of creating relationships

between one economy and another. It promotes sharing of technologies, trademarks,

marketing, intellectual property and even architectural designs.

Franchising is a particularly good developmental tool in any part of the world where financial

resources are short and the need to simulate individual initiative is acute. There are no tariff

barriers to be dealt with. It puts little strain on the receiving countrys balance of payments.

Thus, not surprisingly, awareness of the benefits of this business formula is growing at aninternational level.

How is franchising relevant to India?

Franchising affords India an opportunity to build its commercial infrastructure and develop its

domestically oriented businesses in an efficient, profitable and pan-national manner. It also

offers India the opportunity to import and develop foreign concepts in a way, which ensures

that the equity of the business remains in India, so avoiding the politically undesirable situation

whereby successful domestic businesses are owned by foreign corporations.

The key attractions of franchising in India are as follows:

1. Lower Capital Requirements Franchising is an excellent way for both Indian and foreign

corporations to expand their businesses and make their brand names known in India without

having to risk large sums of money by way of direct investment. The franchisees finance the

expansion of the business in India. In return they have the opportunity to make substantial

income and capital profits.

2. Geographical extent of the country Franchising can enable a company to take advantage

of the vast Indian market of over 1000 million people and growing at a rate of 1.9% p.a. There is

an ever-growing demand of goods and services such as fast food and beverages, clothing,

electronic goods, computer hardware and software and professional services. The

infrastructure is poor, however, and operating a corporately owned distribution system that

fully exploits the geographical expanse of the country is extremely difficult and inefficient.

Empowering participants in the distribution system by granting them an equity interest in it (i.e.

by granting a franchise) can substantially improve the efficiency in the distribution system.



3. Cultural Empathy Franchising well suits the entrepreneurial side of Indian culture. Indian

business people are fiercely proprietary and feel a need to have ownership and control over

their business operations which they can pass on to future generations. However, at the same

time they are keen to benefit from the goodwill and technology that can be provided by the

foreign franchisor. Franchising allows them to reconcile these conflicting ambitions.

4. Harnessing local market knowledge Indian master franchisees offer the foreign

franchisors direct access to substantial market knowledge and a considered and sophisticated

approach to its exploitation. A company needs a great deal of knowledge of the different

regional markets in India. What holds good for Punjab may not be relevant for Kerela.

Franchising provides a sure and easy way of accessing the right level of relevant local market

knowledge.

The four Rs of Franchising?

American corporate history is replete with instances of franchisings outstanding success and

also many failures. Learning from them, franchising can succeed if the franchisee has a right

combination of the four Rs prescribed. These are:

1. Realism The franchisee should be very realistic in assessment of his business strengths

and weaknesses. Certain key areas where realism is a must while deciding to go into franchising

includes questions like are you prepared for the financial insecurity, are you capable of

developing a frame of mind when you can smile and be cordial even when the customer is

totally wrong. More important is the need for realism in evaluating the products and services

offered by the franchisor.

2. Resources Many franchisees, during the early periods of their business when resources

constraints are common, tend to sometimes overlook sending in the royalty cheques to the

franchisor. Franchisors keep feeling and rightly so that their royalty is as much a key business

expenditure of the franchisee as payment for purchases or payroll is and any delay in handling

this area would lead to unfortunate consequences of a long term nature. Therefore, while

planning resources on a periodic basis, consider the payments that are to be made to

franchisor. Another area where most franchisees have problems is to manage their resources

while living within the franchising system. The franchising agreement, in most cases, clearly

indicates systems, procedures and methods of managing the resources. The franchisee will do

well to either be mentally prepared to accept the resource management terms of the franchisor

or make it clear at the beginning that he needs the requisite leeway to manage his own

resources.

3. Research Research on the franchisor is a must for the success. Various published sources

also provide fairly detailed information on most of the franchises that are on offer but to what



extent that will suffice for the Indian conditions needs serious examination. Whatever be the

methodology, the prospective franchisee will do well to build a comprehensive information on

the franchisor, the products or service of offer, competing and substitute products and services

before he makes any move committing his financial resources on a long term basis.

4. Resolve Resolve to be part of the franchising system. The problem starts when a person

gets into franchising only because he has an entrepreneurial instinct but the instant he

becomes a franchisee, the true entrepreneur in him starts resenting the shackles that are

imposed by the franchising system. The options are clear either stay within the system and

fully learn the nuances of the business and prosper or try ones fledging entrepreneurial talent

and get into trouble.

Purchasing a Franchise?

YOU need to consider a variety of important issues at the time of purchase of a franchise. In this

regard franchise consultants can render valuable assistance to you on some of the issues,

including the following key areas:

* Evaluation and review

* Agreements

* Personal liability

* Real-estate

* Legal issues

Comparative analysis

A franchise consultant can assist you in a comparative analysis of various franchise

opportunities by reviewing the offering circular of each franchisor so that you can compare

your various rights and obligations and the strengths and weaknesses of each franchise

opportunity. The best advice a consultant can give you in this regard, however, is not legal

advice but common-sense.

Visit and talk to as many existing franchisees as possible to see how they are doing. They are

already down the road you are thinking of traveling. Are they making money? How long did it



take them to break even? Did the franchisor fulfill its promises? If the franchisees could do it all

over again, would they still buy the franchise? It may also be wise to visit the home or regional

office of as many franchisors as possible to get a feel for the quality of their operation

firsthand.

Finalization of agreements

Once a particular franchise opportunity is selected, a consultant can explain to you your rights

and obligations under the franchise agreement. You should understand that your consultant

has limited ability to negotiate the deal on your behalf, unlike other types of business

transactions. Most franchise offerings, particularly in established franchise systems, are offered

virtually on a take it or leave it basis. This is due to a natural reluctance to negotiate, a desire

for uniformity, the franchisors obligation to disclose the franchise terms (stating whether such

terms are negotiable or non-negotiable) to all prospective franchisees.

Incorporation

While a sole proprietorship is the simplest form of ownership, a sole proprietor has his or her

personal assets at risk for any liability in connection with the operation of the franchised

business. In a partnership the partners are jointly and individually liable for the liabilities of the

partnership and for the actions of the other partners acting within the scope of the

partnership.

With a corporation, a shareholder generally will not be liable for the liabilities of thecorporation except to the extent of the shareholders capital contribution. A shareholders

personal assets are protected.

Estate planning

If you have a substantial estate, you may want to consider certain estate-planning opportunities

to shift any appreciation in the value of the franchise to your children or grandchildren to

reduce your estate tax liability. This can be accomplished without relinquishing control over the

operation of the franchise by having different classes of stock.

Real estate

If you are acquiring real property and/or constructing the premises, a consultant

knowledgeable in real estate matters may be desirable. Lease negotiations can also benefit by

having a consultant knowledgeable in leasing matters.



Franchising in India so far?

Franchising in India is at its early stage and neither business people nor the courts have had

much exposure to it. Soft drinks and hotel franchises arrived in India in the 1960s, but in the

1970s and 1980s, the government expelled foreign brands from India.

Some international franchises have recently come back to India and are doing well. Hotel

business like Best Western Group and the Quality Inn Group have established themselves. Also,

Walt Disney has been successful in having its label in all sorts of goods for children, whether

they are clothing, toys, and school equipments. Fast food chains like McDonalds, Slice of Italy,

Dominos, Taco Bell have also come in. Pepsi and Coke have re-captured the soft drinks market.

A lot of local franchises have also become established. Examples are:

Nilgiris food retailing chain in the south and currently has 10 franchised stores.

Pizza Corner Chain of dine-in restaurants and delivery outlets. Plans to open another 100

franchised outlets over the next 5 years.

Aptech computer-training business which has some 950 franchised centers.

Blue Dart- a courier company with some 840 franchised outlets throughout India.

In India, we have an association set up which deals with the various issues emanating form the

concept of Franchising. In the following page, we have an excerpt from the interview of the

President of the association.

Franchising Association of India

Presidents Message



Mr. C.Y. Pal,

President - FAI

WHILE Franchising, as a way of doing business, has been known in the country for decades the

concept, until recently, was practiced in a very limited way and in many cases was somethingfor which one used the spare real estate, or what ones wife did. With opening of the economy,

the environment for franchising, has in the last few years, undergone a sea change.

With our vast and inherent entrepreneur talent, franchising is now poised to help spur the

economy as it is an excellent way of encouraging private enterprise, it fulfills the growing need

for connecting the customer through self-driven localized business partners called franchisees,

and helps in establishment of global standards for products and services. The practice of

franchising is, thus, fast catching up as is evident from the increasing number of examples wesee around us in diverse fields such in Aptech and NIIT in computer education, McDonalds and

Dominos Pizza in Food, ABF and others in entertainment, DHL and Blue Dart in couriers and

many other examples in healthcare, fitness centres and the like.

Like all business partnerships franchising involves two parties to the deal i.e. franchisor and the

franchisee, while the former provides the brand, the know-how, the training and the systems

for the product or service the later forms the front end for expanding the business acumen

abundantly available in our country at the grass root level. In order to reinforce the basis of a

mutually beneficial and enduring relationship, it is vital to ensure that both the parties

understand their rights and responsibilities to work in unison for success of the business.

It is in this context that the Indo American Chamber of Commerce, supported actively by the

United States Foreign Commercial Service in India and backed by a group of high repute

professionals with extensive experience in the fields of franchising, took the initiative about a

year ago to form the Franchising Association of India (FAI) to provide a forum for Franchisors,

franchisees and other related interests, to promote the concept of franchising. FAI has since

been incorporated as an Association under the Companies Act and after meeting the rigorous

criteria has also been admitted as a member of the prestigious World Franchising Council

(WFC).

FAI is, thus, the only and exclusive body, which will henceforth represent the interests of all

concerned with franchising in India at the national and the international level. Membership of

WFC also helps to provide FAI with strong contacts to the Franchising Association of other

countries including the International Franchising Association in the United States. All these

linkages will clearly help to connect the Indian entrepreneurs with the enormous increase in



opportunities for franchise businesses available all over the world.

The objectives of the Franchising Association of India are:

Encourage and safeguard the business environment for franchising, both with regard to

Franchisors and Franchisees.

Act as a resource centres for current and prospective Franchisors and franchisees, the media

and the Government.

Disseminate knowledge to promote the concept of franchising and to propagate it as a healthy

business practice.

Establish a forum for discussion and deliberation on franchise-related matters and problems

and help promote the interest of members by organizing seminars, conferences and meetings.



Advantages & Disadvantages of Franchising for Indian Businesses?

Advantages to the Franchisee: -

He is the proprietor of its own business and owns the tangible assets of the franchised outlet.

He gains from the franchisor the entire business concept with full training, assistance in every

aspect of setting up and running the business, and access to necessary materials and supplies.

Franchisees have access to regional and national promotions / advertising campaigns.

He gets an access to global standards and international technology in products and services,

without loss of control.

Disadvantages to the Franchisee: -

He is not an independent entrepreneur. He has to follow the franchisors instructions.

The lower risk is offset by the lower reward for the success.

Advantages to the Franchisor: -

Franchising allows him to increase its number of outlets with minimum capital outlay and so

accelerate the networks growth and probably its profitably.

Self-employed franchisees are generally more motivated than salaried managers and are more

likely to give better results for less expenditure of capital on behalf of the franchisor.

Franchising provides him an opportunity to have access to international market.

Franchising gives him an assured earnings stream to fund continuous R & D investment.

Disadvantages to the Franchisor: -

It has to control and co-ordinate a network of semi-independent entrepreneurs to ensure

favorable image of the franchise.

The franchisor-franchisee relationship is based on trust.

MODES OF FRANCHISING

The following are basically 5 types of international franchising mediums: -



Direct Franchising Under this system, the franchisor grants franchises to individual franchisees

in the foreign country through the execution of an international contract. The main problems

associated with this type of franchising is the difficulty of franchisors to control the

performance of the franchisees as these are located in another country, the assistance to be

provided to the franchisee during the operation of the contract. The question of intellectualand industrial property rights in the foreign country also needs to be considered. Taxation is

another issue which receives due consideration. Furthermore, how the franchise arrangement

is structured and the existence of treaties between the countries involved may have

considerable influence on taxation. A very important question is clearly that of the choice of

law and jurisdiction. There is a tendency for franchisors to want their own domestic law to

apply to the agreement, even if the franchise is exploited in another country. Another vital

point to be kept in mind is the law relating to transfer of technology that may be applicable.

Keeping the above problems in mind, it is observed that direct franchising is not used

extensively internationally.

Subsidiary or Branch Office Franchising through a subsidiary or a branch office are two

methods which are often treated together, although there are differences which derive from

the fact that a subsidiary, albeit controlled by the franchisor, is a separate legal entity whereas

a branch office is not. Whatever be the difference, an advantage of this approach is that the

franchisor is present in the foreign country as a corporate body. The contract will in this case be

a domestic contract and thus subject to local legislation.

The problems associated with this type are similar to direct franchising. In addition, the

franchisor will be required to send his personnel to the foreign country for the start up

operations thus involving work permit and residence formalities.

Area Development Agreements Such agreements traditionally involved an arrangement

whereby the developer is given the right to open a multiple number of outlets to a

predetermined schedule and within a given area. These arrangements in the past have been

used mostly in domestic franchising, but are now being used increasingly in international

franchising.

Items that are to be considered here include the number and density of the outlets to be

opened, detailed development schedule and the consequence of non-complying of the

schedule. In such arrangements, the developer will need to have substantial financial resources

so as to be able to open the required number of outlets.

Master Franchise Agreements In the international scenario, this is widely used. In respect to

such agreements, the franchisor grants a person in another country, the sub-franchisor, the



exclusive right within a certain territory to open franchise outlets itself and/or to grant

franchises to sub-franchisees.

In this case, there are two agreements involved: an international agreement between the

franchisor and the sub-franchisor (the master franchise agreement) and a national franchise

agreement between the sub-franchisor and each of the sub-franchisees (the sub-franchise

agreement). The franchisor transmits all its rights and duties to the sub-franchisor, who will be

in charge of the enforcement of the sub-franchise agreement and of the general development

and working of the network in that country. All the franchisor will be able to do is to sue the

sub-franchisor in case of breach of obligation to enforce the sub-franchise agreement as laid

down in the master franchise agreement.

The advantages of this system are that the sub-franchisor is familiar with the local habits,

tastes, culture and laws of its country and that it will know ways about the local bureaucracy for

necessary permits as and when necessary. The disadvantages include that the financial returnsof the franchisor will be reduced by the amount due to the sub-franchisor and also that the

franchisor will have to rely on the sub-franchisor for the performance of the franchise system.

Joint Ventures In the case of joint ventures, the franchisor and a local partner create a joint

venture. This venture then enters into a master franchise agreement with the franchisor, and

proceeds to open franchise outlets and to grant sub-franchises just as a normal sub-franchisor

would do.

An arrangement such as this will have to consider legislation on joint ventures in addition to all

the other legalities that are involved. Problems may also arise with the fact that the double link

may create conflicts of interest for the franchisor. The advantages accruing from this

arrangement may include that it could be a way to solve the problem of financing franchise

operations in countries where financial means are scarce.

Miscellaneous forms There is no limit to the refinement that can be made to the above forms

of franchising to accommodate the differing demands of potential franchisor and / or

franchisee. New forms of franchising, or combinations of different forms of franchising, appear

at regular intervals. Examples of these are stated as follows:

Multi-unit Franchising

Affiliation or conversion Franchising

Franchise within a Franchise



Subordinated Equity Arrangements

Management Agreement

Franchise Buy-ins

LEGAL ASPECTS INVOLVED IN FRANCHISING

Some Basic Legal Issues:

Franchising has been specifically regulated in only a very few countries. In part, this is due to

the complexity of the relationship and due to the great number of areas of law that a

franchising relationship involves. Some of these laws are dealt with hereunder: -

Competition Law or Anti-trust Themes

The resources in the market place would best be allocated by free competition; it is believed

that goods and services are provided at the lowest possible price by the rule of open market

forces. Any conduct, which unreasonably restricts those market forces, must therefore be

eliminated. Terms such as prevention, restriction or distortion of competition, hinder normal

functioning of the market, distortion of normal play of competition are found in most

competition regimes. When considering the expansion of their businesses through franchising,

entrepreneurs should review their business practices and be mindful of their conduct in five

main areas. These are:

1. Horizontal restrictive agreements

2. Excusive dealings

3. Tied sales

4. Territory or customer restrictions

5. Resale price maintenance

Indian Competition Law In India laws to prevent monopolistic, restrictive and unfair tradepractices that distort free competition in the market are found in Part A of The Monopolies and

Restrictive Trade Practices Act (MRTP Act), 1969. Also, the remedies available to the individual

consumers for loss and injury suffered as a result of defective and sub-standard goods and

deception are found in the Consumer Protection Act, 1986 and Part B of MRTP Act, 1969. The

first part of MRTP Act, 1969 is mainly directed against the franchisors, whereas Consumer



Protection Act and Part B of MRTP Act are directed mainly at those Master Franchisees and

franchisees who produce the goods which the Indian Consumer Purchases.

Consumer Protection

It is anticipated that consumer protection laws could have a substantial impact on thedevelopment of franchising in India. As discussed earlier, one of the great strengths of

franchising is that although the franchise network is comprised of independent entrepreneurs

each having entered into a franchise agreement, they all present a common face to the public

who should not be able to distinguish between corporate or franchised outlets. The franchisee

uses the franchisors brand name or goodwill, in relation to the goods he sells or services he

offers to the public, thereby representing that the goods or services are of the same quality or

standard as that of the franchisor. If the consumer finds that it has paid a high price and chosen

the particular brand of goods or a particular agency due to its international reputation, but

does not receive the same quality of goods and services, then it must have a remedy. Also whenthe product of the franchise causes injury to the persons who are the consumer of the products

or causes damage to the property of the consumer, then who should be held responsible?

Consumer Protection Law in India

Consumer Protection Act 1986 is the most relevant to the common man who is the consumer

of the franchised product. This Act covers a wide range of persons who may be liable including

manufacturers, assemblers, distributors, wholesalers, retailers and packers. It may extend to

installers, erectors and repairers of goods. Therefore, the franchisor or franchisee of goods can

fall into this category quite easily. An action in tort may be also maintained if the relationshipbetween the consumer and the franchisor / franchisee can be direct and proximate to create a

duty of care towards the consumer. At present there is no provision for disputes arising

specifically out of franchising in relation to consumer protection, however the general law and

statutes present can provide some relief to the consumer, until such time as specific legislation

in relation to franchising are enacted. A draft model law framed by UNIDROIT has come into

existence.



Intellectual Property Law

The protection of Intellectual Property Rights is of paramount importance to any international

or domestic franchisor that is franchising into a new territory; since its goods can be copied and

marketed by others or its brand name can be misused resulting in its goodwill being diluted.

Further the know-how being transferred by the franchisor to the franchisee in relation to the

product or services needs protection. In India, the Intellectual Property Laws have been in

existence for long, but its implementation has been developing only in the recent years with

considerable interaction with foreign businesses in relation to collaborations, technology

transfers and trade.

Indian Law on Intellectual Property rights

There are various remedies available in India both under Statute and Common Law in relation

to trademark, design and copyright, which are particularly effective against infringement and

trafficking in trademarks. The Trademarks Act, 1999, which came into force subsequent to the

amendment of Trademarks and Merchandise Act, 1958, was enacted to provide for the

registration and better protection of trademarks and for the prevention of the use of fraudulent

marks on merchandise. One of the ways for a franchisor to protect a trademark in India is by

registration. The Designs Act 1911 is aimed at protecting the proprietors of novel or original

designs and for enforcing those rights against infringers. It helps the franchisor to protect his

exact design and maintenance of his goodwill, which is the whole basis of the existence of the

franchise system. The issue of copyright arises in franchise when a franchisor wishes to protect

his franchising manual, which contains the entire technique of running the franchise business

from being used improperly by another. Furthermore, the franchisor may have videos on how

to use the product and for advertisements that need to be protected from being pirated.

Keeping such questions in mind, Copyrights Act, 1957 has been enacted and gives protection to

the franchisor against the above apprehensions.

Labour Laws relating to Franchising

Labour laws are very important in International and domestic franchises especially in relation to

the various outlet, shops and offices in which persons are employed. No franchising contractcan derogate from the applicability of the labour laws. The labour laws govern the day-to-day

conditions of employment and are particularly relevant in the franchising context when an

outlet is shut down or the business is sold, in relation to the amount of compensation payable

by the master franchisee, franchisor or franchisee.

Labour Laws in India



India has numerous labour laws which any foreign or domestic franchisor must be well aware of

before doing business, and to mention a few: -

Apprentices Act, 1961

Contract Labour (Regulation & Abolition) Act, 1970

Employees Provident Funds and Miscellaneous Provisions Act, 1952

Employees State Insurance Act, 1948

Equal Remuneration Act, 1976

Factories Act, 1948

Industrial Disputes Act, 1947

Minimum Wages Act, 1948

Payment of Bonus Act, 1965

Workmens Compensation Act, 1923

Payment of Gratuity Act, 1972

Payment of Wages Act, 1936.

Insolvency Laws

Although the general picture of franchising is one of success, there have been cases of

insolvency among the franchisees and franchisors. Insolvency becomes an issue if either the

franchisor or one of the franchisees becomes unable to pay its debts as and when they fall due.

Clearly, the risk of insolvency for both franchisor and franchisee in India will be greatly

increased if the franchise concept is a foreign one and it has not been properly adopted for the

Indian market.

Insolvency Law in India

The laws that are relevant in India in relation to insolvency are found in the Companies Act,1956 and the Provincial Insolvency Act, 1920.

Documentation Involved?

Let us list hereunder some of the documents that are involved while franchising a business: -



The Manual It is the embodiment of the know-how of the franchise. It is therefore of

paramount operational importance. It is very dynamic in nature and continuously undergoes

amendments as the business develops. Let us list here the various contents of a manual:

Shop layout

Staff schedules

Staff uniforms / appearances / etiquettes

Staffing requirements of outlets

Contracts of employment

Training requirements

Pricing policies

Accounting procedures

Advertising and Marketing practices

Technical information on equipments.

Uniform Franchising Offer Circular (UFOC) The UFOC is based on the American system of

disclosure and franchisee protection. UFOC, like a prospectus, is mandatorily to be given by

every person offering to sell a franchise and should contain information on the following

aspects:

Information about the franchisor, his affiliates and their related businesses

Complete professional experience of each of the officers, directors and other managerial

personnel of the franchisor

Clear descriptions; including the nature, extent of involvement, liability, etc.

Full details of the up-front fee payable on the franchise and fee payable on the conclusion of

the agreement together with on-going payment schedule.

Assistance provided technically and financially

Restrictions to be imposed, if any, in relation to sale of goods or services.

Details of the training to be provided



Quantitative data on the number of franchises in operation together with complete list of

names and addresses of all franchisees.

Complete and unambiguous disclosure on restriction imposed in relation to protected

territories, if any.

Terms of termination of the contract

Dispute settlement mechanism.

As India enters the era of franchising, first as a nation having large number of franchisees

before it could perhaps graduate into being a nation of franchisors, the need for clear laws and

implementable guidelines to regulate this form of business is essential.

Franchising Agreement A draft agreement between a franchisor and a franchisee is given

herein below: -

THIS AGREEMENT is made _____ day of _____ between _________ having its registered office

at __________ (hereinafter called the franchisor)

of the first part and _________ having its office at ___________ (hereinafter called the

franchisee)

of the second part.

WHEREAS:

The franchisor has spent time, money and effort in developing knowledge of and expertise

(the know-how) in _________ (hereinafter called the services)

The franchisor wishes to expand the provisions of services and is willing to grant to the

franchisee the rights set out herein.

The franchisee desires the right during the continuance of this agreement to provide the

services from the premises specified in schedule 1 hereto as directed in the operation manual

(the manual)

NOW IT IS AGREED AS FOLOWS:

Rights Granted

The franchisor grants to the franchisee the right to carry on the business in accordance with this

Agreement from the premises, to utilize the Know-How and to use the Marks.



Term

Subject as herein appears this agreement shall be for a period of _____ years, commencing

from the _________ day of ______.

Franchisors Obligations-

The franchisor shall:

Assist the franchisee to establish and efficiently operate the business.

Train the franchisee and his staff in the correct operation of the business

Give the franchisee such reasonable continuing assistance and advise as the franchisor

considers necessary.

4. Franchisees Obligations-

The franchisor authorizes the franchisee to use the Mark solely for the purpose of promoting

the business

The franchisee undertakes not to do anything to prejudice or damage the goodwill in the Marks

or the reputation of the franchisor

The franchisee agrees in order to protect the franchisors intellectual property rights and

maintain the common identity and reputation of the network to comply with the quality

specifications laid down for the equipment.

The franchisee agrees to carry on the business under the Marks and no other name.

The franchisee undertakes to use his best endeavors and the highest standards in all matters

connected with the business diligently and in a manner to the reasonable satisfaction of the

franchisor.

The franchisee agrees to insure with a major reputable insurance company in an adequate sum

against all normal and reasonably foreseeable risks relating to the conduct of the business

including product liability.

The franchisee undertakes to indicate on all correspondence and notice board outside the

premises the fact that it is an independent franchisee of the franchisor and is in no other way

connected with it.

To indemnify and keep indemnified the franchisor from and against all damage or liability

suffered by it as a result of the franchisees acts or omissions.



5. Financial Obligation -

The franchisee shall pay to the franchisor immediately upon signing this agreement a franchise

fee to the tune of Rs. _______. Further, a monthly sum of service management fee equivalent

to 5% of the previous months turnover will be paid.

6. Promotion and Advertising -

The franchisee shall upon receiving written notice from the franchisor pay on a monthly basis, a

sum equivalent to 2 % of the previous months gross turnover into the franchisors Promotion

and Advertising Fund. Such fund shall be used solely for the national and regional advertising of

the services.

7. Franchisees Accounts and Audit-

The franchisee shall maintain proper books of accounts relating to the business and shall supply

the same to the franchisor within 30 days after the end of each financial year with an audited

certificate.

The franchisor or its auditor shall be entitled to inspect and audit the books of accounts and all

supporting documentation of the franchisee relating to the franchised business.

8. The Sale of the Business -

The franchisee may not assign or delegate his franchise or any other right or

obligation under this agreement, but may sell his business with the prior written consent of the

franchisor.

9. Termination-

The franchisor may terminate this agreement by a notice in writing to the

franchisee if it has committed any material breach of his obligations specified under this

agreement or if any sum required to be paid under the terms has not been paid at the latest

within 21 days following its due date.

10. Force Majeure -

This agreement shall be suspended during the period and to the extent of such period that the

franchisor reasonably believes any party to this agreement is prevented or hindered from

complying with its obligations under any part of it, by any cause beyond its reasonable control

including but not restricted to strikes, war, civil disorder and natural disasters.



11. Arbitration -

In the event a dispute or deadlock arises in connection with the validity, interpretation,

implementation or breach of this Agreement the Parties shall attempt, in the first instance to

resolve such dispute through negotiations within thirty (30) days or within such longer period

as may be agreed to between the Parties in writing. In the event that the dispute is not resolved

through negotiations, or such negotiations do not begin within the reasonable time period set

out in the notice calling for the same, either Party may refer the dispute to Arbitration, with

each Party nominating one Arbitrator, and the two Arbitrators so appointed shall nominate a

third Arbitrator to constitute a three (3) member arbitral tribunal. The Arbitration proceedings

shall be conducted in accordance with the Rules on Arbitration framed by the International

Chambers of Commerce.

12. Miscellaneous -

Language: This contract, and all data and documentation, reports and other written materials,

and all communications between the parties pursuant to performances of this contract, shall be

in the English Language.

Amendments: No modification, amendment or waiver of the terms and conditions of this

Agreement, shall be valid or binding, unless made in writing and duly executed by both the

Parties.

Headings: The headings used in this Agreement are for convenience only and are not to be

used in construction or interpretation.

Signed for and on behalf of

__________________________ Ltd. By

_______________________, Director.

________________________, Director.



Witnessed by:

_________________________.

Place: __________________

Date: __________________.

Procedure for Approval of Foreign Franchises in India?

The approval procedure is complex and bureaucratic. The application has to be made to

Secretariat for Industrial Assistance, Department of Industrial Development in form FC (SIA)

along with 10 extra copies. No fees need to be paid with the application for technical

collaborations.

On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration number. The

application is then sent to the Foreign Collaboration section 1 in SIA, which sends the document

to various departments such as the technical advisory section, department of economic affairsand the concerned administrative ministry for scrutinizing. Their comments along with the

papers are then put before the Project Approval Board (PAB). The Board takes into account the

need for foreign know-how, technology transfer and the terms of the franchising agreement.

Those proposals involving only financial collaboration or a combination of financial and

technological collaboration are sent to the Foreign Investment Promotion Board (FIPB). If the

investment in the project is up to 600 crore rupees, the application is sent for final decision to

the Empowered Committee headed by the Finance Minister. In respect to projects requiring

more than 600 crore rupees, the application is sent to the cabinet committee for final approval.

The Section 2 of SIA issues the final approval within a period of approximately 45 days from the

submission of the application form.

The approval by the government may vary the terms of franchise including the mode of

payment of royalty / lump sum payment to the franchisor. If the terms are not favorable to the

franchising business, representation against the same can be made to the administrative



ministry concerned. A copy of the representation made by the applicant should also be sent for

information to the Foreign Collaboration Section 2 of SIA.

We thus see the bureaucratic bottlenecks involved in obtaining the permission to set up foreign

franchises in India. This deters investment.

Draft Model Law on Franchising made by UNIDROIT?

The following is the text of the draft model franchising disclosure law as revised by the study

group at its fourth session, 9-19 December 1999.

Article 1

This law applies to franchises granted for the operation of one or more franchised businesses

(within the national territory of the state adopting this law)

Article 2

This article covers definitions relating to affiliate of the franchisor, development agreement,

disclosure document, franchise, master franchise, and sub-franchise agreement.

Article 3

No disclosure is required: In case of the grant of a franchise to a person who has been an officer

or director of the franchisor for at least 6 months immediately before signing the franchise

agreement.

In case of the assignment or other transfer of a franchisees rights and obligations under an

existing franchise agreement, where the assignee or transferee is bound by the same terms as

the assignor or transferor.

In case of the renewal or extension of a franchise on the same conditions.

If the transaction is pursuant to an offer directed by the franchisor to only one person or entityfor the entire jurisdiction.

Article 4

Disclosure must be in writing. The format of the disclosure document is as per the discretion of

the franchisor, provided it contains all information imposed by this law.



Article 5

A franchisor must give every prospective franchisee a disclosure document, to which the

proposed franchise agreement must be attached at least 14 days prior to either the signing of the agreement by the prospective franchisee or the payment by the prospective franchisee of

any fees relating to the franchise.

Article 6

The franchisor shall provide the following information in the disclosure document:

The legal name and address of the franchisor

The address of the principal place of business of the franchisor

The description of the business experience of the franchisor

Complete professional experience of each of the officers, directors and other managerial

personnel of the franchisor

Relevant details of any criminal or civil liability for the previous 5 years

The total number of franchisees in the network

Information regarding the franchisors intellectual property rights.

The following information shall also be included in the disclosure document. However, where it

is contained in the agreement, the franchisor may make a reference of it.

A description of the franchise to be operated by the franchisee

Terms and conditions of renewal of the franchise

A description of the training facility

Conditions for termination.

Where the franchise is a master franchise, the sub franchisor must in addition to above items,

disclose to the prospective sub-franchisee the information that it has received under the above

points as well as the situation of the sub-franchise agreements in case of the termination of the

master franchise agreement.

Article 7



The franchisor may require the prospective franchisee to sign a statement acknowledging the

confidentiality of the information relating to the franchise.

Article 8

As a condition for its signing the franchise agreement, the franchisor may require theprospective franchisee to acknowledge in writing the receipt of the disclosure document.

Article 9

The disclosure document must be written in a clear and comprehensible manner in the official

language of the principal place of business of the prospective franchisee or in the mother-

tongue of the franchisee.

Article 10

If the disclosure document is not delivered at all or is not delivered within the period of time

established in article 5, the franchisee is entitled to terminate the franchise agreement

If the disclosure document contains a misrepresentation or if there is an omission of a material

fact required to be disclosed under article 6, the franchisee is entitled to terminate the

franchise agreement.

The above is a model law yet to be passed. Countries, like India, which do not have any specific

legislation, could take the above as its basis of franchising law governing their territory.

Financial And Taxation Aspect of Franchising

Valuation what is the franchise worth?

A franchise is like any other asset. Ultimately, its value is what people are willing to pay for it.

However, when considering the commercial viability of licensing as compared to some other

form of exploitation, it is important to try and scientifically arrive at a reasonable valuation. It is

only when the franchisor and the franchisee have taken a view as to the value of the franchise

that negotiation can take place and ultimately a franchise granted. When entering into a master

franchise / development agreement, the franchisor undertakes a number of commitments,

which cost money and thus forms the basis of valuation. These include:

Training



Technical and / or marketing support.

Making improvements available

Use of trademarks

Supplying goods.

Service fees, royalties and other sums paid in return for the franchise represent a return on the

valuable asset. Now the question arises as to How do we calculate the return? Some of the

possible ways to calculate the amount is discussed hereunder:

Net Cash Flow It takes into account costs of doing business as well as additional capital

investment needed to sustain the cash flow. The net cash flow represents the economic

benefits derived from the ownership of the franchise. These are determined by management

actions together with factors like:

Economic Climate the value of a franchise is directly associated with the general trends in the

economic situation.

Profitability this aggregates the cost element, such as wages, procurement of raw materials,

conversion of raw materials, sales and overheads.

Competition The strategies of competitors can limit the amount and duration of future cash

flows and must therefore be taken into account.

Capital Requirement This can reduce the amount of future net cash flows that are derivedfrom the franchise.

Actual and potential value A franchise need not have immediate economic benefits for it to

be valuable. Indeed, established brands may often need further developments before they

have actual value in a foreign territory. This approach takes into account the following factors:

Discount Rate Inflation can diminish a purchasing power of future economic benefits.

Liquidity represents the difficulty with which an investment can quickly be converted into cash.

Real Interest This represents the component of return from investment with sacrificing

alternative use of the invested funds.

Risk Premium This is the ended amount of return that investors demand for the assumption

of risk.

Discounted Cash Flow Method This method determines the present value of projected cash

flows associated with the franchise. The present value is the value in todays money of the



expected cash flows generated by the asset being valued. Cash flows are adjusted for the time

value of money and the risk of their eventual realization.

Cost Method This approach focuses upon the cost of creating an economically equivalent

substitute, i.e. replacement value. It is interesting to note that in determining the value of a

franchise, the cost of the original development is rarely discussed. The reason for this seems to

be that they do not fit into the equation suggested. They are seen as necessary but irrelevant as

regards calculating the value. Millions of rupees might be spent upon R & D, but if the final

franchise does not work, it will have no value.

Comparable Value Method Market value can be transaction based or security price based. In

order to make progress with this approach, it is important to identify a business, which is truly

comparable in an economic sense, and secondly once such a comparable business has been

identified, obtaining the relevant information much of which will be confidential and

therefore inaccessible- will be the task at hand.

Taxation Aspect?

Taxation is another issue which receives due consideration. It is important to know the local

sales tax, property tax, and withholding tax applicable in a certain area. Furthermore, how the

franchise arrangement is structured and the existence of treaties between the countries

involved may have considerable influence on taxation.

The situations and types of taxes that apply to franchising in India are described below: -

Where the franchisor receives royalties service or franchise fees, tax has to be paid under theIncome Tax act, 1961 as income arising and accruing in India, whether the franchisor is an

Indian or foreign party.

If the franchise is wholly based in India, then the franchisor and franchisee as separate

companies or partnerships will be subject to the taxes applicable to all Indian Companies

incorporated under the Companies Act, 1956.

In a case where the franchisor is a foreign party and the franchisee is Indian, and the franchisor

sends technicians and supervisors to India, the salaries payable to these persons would be

subject to personal income tax, whether an arrangement is made to deduct the tax at source or

they are taxed as self employed persons if they come as consultants.

If the franchise agreement provides that the franchisee shall export or sell to the franchisor

some of the goods produced by it, then taxes will be levied on the deemed profits.



If the master franchisor is a foreign company, it will be taxed only on income that arises from

operations carried out in India or in certain cases, on income that is deemed to have arisen in

India. The latter includes royalties, fees for technical support, interest, gains from sale of capital

assets situated in India and dividends from Indian companies.

Advance tax has to be paid by both, Indian and foreign corporate assesses, whose taxable

income exceeds Rs. 5000/- p.a.

In calculating the amount of tax payable by the franchisor / franchisee company as assessee,

the deductions available in Section 30 to 43D of the Income Tax Act, 1961 can be important for

tax planning purposes. Some of these relate to:

Rent, rates, taxes, repairs and insurance in respect to premises used for business.

Depreciation

Expenditure on scientific research

Expenditure of a capital nature on acquisition of patent rights or copyrights

The availability of tax advantages would depend on the type of franchise, the product of the

franchise and where the unit is to be physically located.

Collection of Tax the income received by the foreign franchisor are taxable, and these have to

be paid in India through an agent which could be the sub-franchisee himself.

Capital Gains Tax is relevant to a franchise business as any profits and gains arising from thetransfer of a capital asset effected in the previous year is chargeable to income tax under the

head capital gains.

Advance ruling on Taxation if a foreign Master Franchisor has any apprehensions or

uncertainties regarding the tax implications of any venture or transaction in India, a reference

or application can be made to the Advance Ruling Authority under Section 245N of the Income

Tax Act, 1961.

It must be noted that the above is subject to Double Taxation Avoidance Agreements entered

into by India with any foreign country. The tax liability would accordingly be reduced. Section90 of the income tax act gives recognition to this and this agreement takes precedence over the

terms of the income tax act.

Termination of Franchises



Termination of an international franchise system is without doubt one of the most difficult

issues for a franchisor to face. Not only must the franchisor face often complex legal provisions,

sometimes providing for substantial compensation, it must face the daunting task of deciding

exactly what should happen to the franchise in the territory following the termination.

Commercial Issues

The prospect of terminating a franchise agreement with a Master Franchisee, developer or

franchisee raises a question of what is to happen to the franchise in the territory following the

termination. The answer will inevitably depend on the value and potential value of the market.

If the territory has a number of profitable outlets up and running, it will usually allow them to

continue. One way of achieving this is to terminate the Master Franchisees right to open new

outlets.

If full termination is the only possibility, the choices for the franchisor are:

Pulling out of the territory

Stepping into the master franchisees shoes

Appointing a new master franchisee for the whole territory.

Legal Issues

The whole question of jurisdiction and conflict of laws is absolutely vital for the draftsman toconsider when contemplating what may occur in the case of termination. Termination is

generally resulted from breach of the franchising agreement. In such cases, the grounds are

quite reasonable and, provided the obligation of notice being served is duly complied with,

termination is set in action.

Some of the legal issues that are to be kept in mind are:

Intellectual Property rights It is important that following termination, the franchisor takes

steps to protect its trademarks and other intellectual property rights from the abuse by the

master franchisee / developer / franchisee.

Arrears non-payment of declared sums is a somewhat easier matter to deal with as the

franchisor can weigh up the pros and cons of entering into litigation.



Real Estate - At least part of any real estate owned by the Master Franchisee / developer /

franchisee used in the business may also have to be transferred. Valuation will create great

difficulty.

Goodwill A further issue which can arise is the Master Franchisee / developer / franchisee

desiring to retain at least some of the goodwill established in the franchise and carry on the

business in the territory under a different name.

Conclusion -

Termination is to be avoided if at all possible. However, if the situation is one to which there is

no other acceptable response, it must be effected quickly and efficiently. Careful planning of

the legal procedures and subsequent commercial action is essential.

Franchising in other countries

Different countries have taken different approaches in regulating franchising within their

territory. Those areas of franchising relationship that are usually regulated are recruitment, the

relationship and termination rights. Regulation takes the form of mandatory forms of

disclosure, registration of the franchise document and statutorily prescribed contractual

provisions as regards, for example, termination.

Now, let us see how franchising has been regulated in other jurisdictions:

United States

Franchise legislation in United States is of 2 types:

The relationship between the parties after the franchise has been initiated

The offer and sale of the franchise Disclosure Legislation. This again is of two forms. At federal

level, in the form of the 1979 Federal Trade Commission (FTC) Rule on Disclosure Requirements

and Prohibitions Concerning Franchising and Business Opportunity Ventures. Then at the state

level in the form of state legislation.

Under the legislation, the franchisor has to go through a process of registration and

examination by state administrators. The FTC Rule requires franchisors to provide prospective

franchisees with a document with detailed information regarding:

The franchisor, his directors and officers



Litigation and bankruptcy histories

The franchise to be purchased

Initial and recurring payments

Obligations and duties

Termination, cancellation and renewal provisions

Training

Site selection

Australia

The Franchising Code of Practice (Code) came into operation on 1.2.1993 and was

administered by the Franchising Code Administration Council Limited (FCAC).

The Code is intended to provide a best practice guide to regulate the relationship between

franchisors and franchisees. Registration under the code was voluntary, but once registered,

franchisors were required to comply with its terms. The introduction of the code was intended

to provide, amongst other things, minimum prior disclosure standards, to facilitate improved

dispute resolution between franchisors and franchisees and to improve franchise business

practices generally.

The code regulates not only the direct parties involved, but also those providing ancillary

services, such as financial institutions, advisers and publishers.

Europe

The European Code of Ethics for Franchising adopted by the European Franchise Federation

(EFF) provides that in order to allow prospective individual Franchisees to enter into any

binding document with full knowledge, they shall be given a copy of the present Code of Ethics

as well as full and accurate written disclosure of all information material to the franchise

relationship, within a reasonable time prior to the execution of these binding documents. The

code further provides for a general obligation that advertising for the recruitment of individual

franchisees shall be free of ambiguity and misleading statements.

The European Code is applicable to the members of the national associations which are

members of the EFF, i.e. Austria, Belgium, Denmark, France, Germany, Hungary, Italy,

Netherlands, Portugal and the United Kingdom.



Franchising Precedents

Let us evaluate some of the franchise outlets that have been successful in running their

businesses.

McDonalds Franchising

We Have Always Been A Franchising Company

McDonalds has always been a franchising Company and has relied on

its franchisees to play a major role in its success. McDonalds remains

committed to franchising as a predominant way of doing business.

Approximately 70% of McDonalds worldwide restaurant businesses are owned and

operated by independent businessmen and women, our franchisees.

A Recognized Premier Franchising Company

McDonalds continues to be recognized as a premier franchising company around the

world. Perhaps the fact that McDonalds management listens so carefully to its franchisees

has something to do with McDonalds being perennially named as Entrepreneur Magazines

number one franchise.

A Partnering Relationship

Our franchising system is built on the premise that the Corporation can be successful only if

our franchisees are successful first. We believe in a partnering relationship with our owner/

operators, suppliers and employees. Success for McDonalds Corporation flows from the

success of its business partners.

What We Are Looking For

Our selection of prospective candidates is based on an assessment of overall business

experience and personal qualifications. We look for individuals with good common

business sense, a demonstrated ability to effectively lead and develop people, and a

history of previous success in business and life endeavors. A restaurant background is not

necessary. We franchise only to individuals, not to corporations, partnerships, or passive

investors.

International Franchising



McDonalds Is Seeking Qualified Individuals To Become Franchisees

We are particular about our Franchisees because they make

McDonalds successful by focusing on customer satisfaction. Thats

why...

We are looking for individuals who have:

Business experience in the market where they are seeking a franchise

A strong desire to succeed, work hard, and contribute to a winning team

Demonstrated personal integrity with emphasis on interpersonal skills

A willingness to participate in a comprehensive training program

A willingness to personally devote full-time efforts to the day to day operations of a McDonaldsrestaurant business

A history of success and the ability to work well within a franchising organization.

Personal, non-borrowed resources to be invested in a McDonalds restaurant business

McDonalds Offers:

A chance to run your own business without being alone. You will be supported by the world

famous McDonalds System.

Support in the areas of operations, training, advertising, marketing, real estate, construction,

purchasing and equipment.

Personal satisfaction both as an owner/operator and as a member of McDonalds worldwide

organization.

Personal growth and business knowledge from McDonalds extensive training.

Franchising Frequently Asked Questions

Q: What business qualifications does McDonalds seek in its potential franchisees?

A: The following qualifications, among others, are essential to be considered for a McDonalds

franchise:

High personal integrity

An entrepreneurial spirit and strong desire to succeed



Q: What is the availability of opportunities in my country?

A: The availability of franchises in specific geographic areas must be discussed with McDonalds

franchising personnel in the specific country for which you have interest. However, as you can

appreciate, McDonalds cannot predict which locations will be available when your training is

complete. Therefore geographic flexibility is a characteristic we seek in candidates.

Q: Will McDonalds buy a piece of property that I own and then sell me the franchise for that

location?

A: Our franchisee selection process does not play a part in our site selection. In other words, we

develop a location because we think it will be successful and without regard to whom the

franchisee may be. McDonalds does all of the site evaluation and selects the location. We

acquire the property, improve the site and construct the building. The franchisee is responsible

for equipping the facility with all necessary items of kitchen equipment, seating and decor,

signs and landscaping, etc. As sites are developed, we offer them to candidates who have

already completed training and are approved to become owner-operators. .

Notable Franchising Facts

First Franchised McDonalds Restaurant Des Plaines, IL 1955

First McDonalds Franchisee Art Bender 1955

First International McDonalds British Columbia, Canada 1967

First Twin Grand Opening Two Restaurants in Cairo, Egypt 1994

McDonalds International Division Created 1969

Seven of the worlds busiest McDonalds are located in Hong Kong

McDonalds franchisees developed 3 of our famous sandwiches.

Big Mac Jim Delligatti

Filet-O-Fish Lou Groen

Egg McMuffin Herb Peterson



First Restaurant in DesPlaines, IL

Salient Features of Wimpys Franchise in India

One time non-refundable upfront franchise fee for a 10-year contract.

All investments for establishing the restaurant to be provided by the franchisee, Investments

would depend upon the size of the restaurant, seating capacity, etc. etc.

Licenses, Power load, etc. to be arranged by franchisee / investor.

The restaurant shall be run, managed and controlled by the franchisee. All costs for day to day

running of the outlet shall be incurred by the franchisee. The raw material shall be supplied by

the franchiser, Wimpy International Limited at ex-factory cost.

The franchisee shall pay a sum equivalent to 7% of the net sales as Royalty.

OR

No working capital deployment by the franchisee. Restaurant shall be run, managed and

controlled by WIMPY Management at their cost. All costs for day to day running of the outlet

shall be incurred by WIMPY.

An attractive return is assured to the franchisee / in terms of fixed percentage of net sales

starting from 1st day of operations.

Wimpy International Ltd. shall provide advice and consultation concerning the site feasibility

assessments through its officials/professional specialists. All expenses and charges for whom

will be paid for by the FRANCHISEE.

Strategic outlook for the soft drinks industry in 2010



Publication date : Feb 1, 2001

Author : Canadean Ltd

The revolution is already under way

Over the next decade the global soft drinks industry is l ikely to undergo probably the most

fundamental change in its entire history, according to a new report from Canadean, the

international beverage research specialists. With its traditional focus mainly on carbonates, and

notably colas, often involving complicated franchise systems, the soft drinks business is already

in the throes of a major revolution which encompasses the very concept of a soft drink as well

as questioning the relevance of the franchise system that has served the industry so well for so

long.

At the same time the competitive landscape is shifting dramatically, says the Canadean report.

Once mainly the preserve of Coca-Cola and Pepsi-Cola, the carbonates market alone is seeingsuccessful local players emerge to challenge the pre-eminence of the US multinationals, from

Europe to South America. In the context of the wider definition of soft drinks, the competitive

line-up now includes international majors such as Nestle, Danone, Unilever and Procter &

Gamble.

Who will set strategy now?

Against this background the Canadean report spells out the sort of conflicts that could arise

within the existing franchise system for soft drinks, consisting as it does of brand owners and

brand bottlers, especially the more recently consolidated anchor bottlers - now very largebusinesses in their own right. The whole ethos of the anchor bottler is based on achieving ever

more efficient production built around fewer and fewer high speed filling lines. That implies

constant product and brand rationalisation. On the other hand, a strategy which embraces the

new wider definition of soft drinks implies product proliferation. So who will set the strategy

agenda in the future? How are these two seemingly opposing strategies to be reconciled?

Pressures for lower concentrate prices

Moreover, the growing importance of anchor bottlers within the franchise system raises even

more fundamental questions for the brand owners. In recent years both Coke and Pepsi have

learned to their cost the need to stay close to local consumers, and are now reversing earlier

strategies aimed at centralising their global operations, especially marketing. As they

decentralise that role, and the added value function of global marketing becomes increasingly

superfluous, there will be growing pressure from anchor bottlers for the brand owners to pass

on corporate savings in lower concentrate prices. That pressure is likely to become even more



intense wherever it becomes apparent that brand owners field operations are duplicating

those functions already performed by anchor bottlers local subsidiaries. The franchise system

can no longer afford a multiplicity of brand managers responsible for a single brand, for

example.

Franchise/Bottler Profit Split

Is There Enough To Share?

Significantly reduced market growth (3-4% in the 1990s against 6%-8% in the 1980s), coupled

with low inflation, hugely increased retailer customer buying power, as well as markedly lower

entry costs for local soft drinks manufacturers have brought about an intensification of price

competition. This has thrown into sharp relief the franchise systems dependence on sharing

the total profit available - at a time when overall profitability is being eroded. So, sharing this

smaller pie is bound to create even more pressures within the franchise system.

The relative performance of share prices - brand owners vs bottlers - has also underlined the

significant differences that exist between the low capital intensity of the brand owners balance

sheets (reflected in a high return on capital employed) and the high capital intensity of the

anchor bottlers which typically achieve half the rate of return of brand owners. Furthermore,

the fact that Coke and Pepsi are still very substantial owners of anchor bottlers shares may also

mean they could be faced with a delicate fiduciary balancing act when it comes to decisionswhich directly affect bottler profitability.

Changing competitive landscape

Finally, the report explains how local companies have emerged to compete successfully with

the US multinationals. Key factors working in favor of local players include the sharply reduced

costs of market entry ranging from packaging to media; the widespread availability of technical



know-how provided by flavor houses, filling equipment makers, packaging suppliers; the role of

leading food chains in demanding higher quality and lower prices in return for extended supply

contracts - an imperative which does much to explain the continuing focus on pruning

overheads within such companies. Moreover, there is growing evidence that soft drinks

manufacturers, which operate within a single integrated system, may be attaining a level of profitability, which is greater than half the total profit pot, which has traditionally been

available to the whole of the two-tier franchise system.

contract of franchise

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