Advantages and Disadvantages of Selling a Franchise
Business and Startup related matter

Advantages and Disadvantages of Selling a Franchise

Starting a new business is not something you do on a whim. You will spend a lot of time researching the benefits and drawbacks of entrepreneurship and will have a lot of queries about it. Franchising appeals to many would-be entrepreneurs because it allows them to run a successful business without setting up a business. There are many advantages and disadvantages of starting a franchise for both franchisors and franchisees. The franchisee is a third-party buyer who buys the franchisor's brand rights (the brand owner). The franchisee pays the franchisor an initial franchise fee in exchange for the right to use the brand and regular franchise fees for marketing, royalties, and other expenses.

Advantages of Selling a Franchise

The initial component needed in order to start a franchise is 'capital'; the capital can be made available from the franchisees itself and thus no need for the franchisors to take out a loan. The most important actor that keeps the place running are the staff and employees in the franchise, and thereby their training becomes an essential aspect in the franchise's day-to-day operations. The franchisor only makes sure to give the technical and business knowledge to the franchisee at the start, thus the daunting task of the management, training and hiring of the staff falls on the shoulders of the franchisee. Moreover, in the longer run the franchisor faces minimal risk since the responsibility of taking the debt and liability is on the franchisee, thus the franchisor can focus on the bigger picture related to the overall success of the business.

When discussing the advantages that a franchisee has when opening a franchise, all the crucial information and training that makes any given franchise a success are duly provided by the franchisor for they need to ensure the preservation of their goodwill. This forms a part of comprehensive business assistance which includes brand, location, equipment, advertising plan and a structural business plan provided by the franchisor. This is commonly called 'turnkey business' in which everything that a buyer needs to start running the business immediately is already provided. Another advantage of franchise business is that a loyal customer base has already been made over the years and the people are already familiar with the brand name.

People Also Read This: Types of Franchise Business Models

Disadvantages of Selling a Franchise

Some significant disadvantages of a franchise for a franchisor are:

  • Lack of control over business processes after franchising the business.
  • There is always a risk that the franchisee may violate applicable laws and regulations.
  • There is no guarantee that the brand would expand and generate a customer base.
  • There are significant risks as to infringement of intellectual property and proprietary information.
  • Training costs and liability for wrongs committed by the franchisee often pose risks.

People Also Read This: Franchise Terms And Conditions In India

With the advantage of enjoying the franchisor's brand name, there come the checks and balances that the franchisee must deal with regularly. To be assured that the franchise runs smoothly and makes profits; will try to oversee the entire financial system that the franchisee operates. Thus, this might be restrictive of the autonomy of the financial powers of the franchisee. Therefore, the whole notion that the franchisee is his' boss' is not entirely true since we can see that the franchisee does not always enjoy individual control when it comes to implementing creative ideas in the business and have to comply to the strict interpretations of the regulations and standards by the franchisors in the franchise agreement.

Franchise Terms And Conditions In India
Agreement & Contract

Franchise Terms And Conditions In India

What is Meant by the Term Franchise?

A franchise (or franchising) is outsourcing one’s brand to enhance distribution. A franchisee has to pay a royalty and/or an initial fee for the right to do business under the franchisor's name and their system. Although technically, the term "franchise" refers to the contract that links the two parties, it is more usually used to refer to the franchisee's actual business.

What are the Terms and Conditions of a Franchise Agreement?

The following are some of the key terms which are generally included in a franchise terms and conditions agreements:

  1. Royalties: A franchise contract spells out a franchisor's royalty structure. The Franchisor imposes terms on a franchisee, such as paying a fixed fee or a % of the benefit to use his brand's name.
  2. Validity Period of Franchise: The validity term specifies how long the franchise agreement will last. The Franchisee learns that he can utilise the Franchisor's brand name to develop his firm for a certain period.
  3. Location Selection: The franchise agreement specifies the territory in which the franchisee will operate. It indicates who owns the trademark and who has the right to use it.
  4. Site Selection: The selection of a site is an important aspect of the service. The Franchisee is expected to name a few locations where the franchisee business will be run, and the Franchisor will then finalise this choice of location for the next step in the process.
  5. Franchise Fee:Every franchise has its own set of fees. These fees include the original franchise fee, recurring franchise fees, royalty fees, and other fees. Late fees and interest are also included in this agreement. Any necessary expenses should also be covered under the contract. For example, the franchisee may be responsible for travel expenditures, training, and other costs.
  6. Operations Support:This outlines all operating requirements that must be followed moving forward. It also specifies what products or services a franchisee can provide or sell. The operational support provision covers all purchases that a franchisee must make before the franchisor.
  7. Training Support: The Franchisor provides training assistance to each Franchisee. It ensures that franchise businesses run smoothly by studying the origins of the main corporation. 
  8. Advertising: The Agreement should set all the Franchisor’s obligations to support the franchisees with advertisement.
  9. Policy Renewal or Cancellation Terms: The franchise agreement's prerequisites and circumstances for renewing or cancelling a franchise agreement are outlined. To protect themselves against illegal conduct or breach, the franchisors also include an arbitration clause.
  10. Trademark: A franchise agreement gives the franchisee the right to use trademarks, the franchisor's name, slogans, logo, service marks, signage and designs, and anything else that has to do with branding.
  11. Non-Disclosure/ Confidentiality: A franchisee is privy to various trade secrets during the franchise agreement, including proprietary formulas and recipes and how the franchisor conducts the business. This information is kept private by the franchisor, who often adds confidentiality terms, deeds, and restraints in the franchise agreement.
  12. Contract Long Term Duration: The franchise agreement specifies the length of time the contract will be in effect. The majority of franchise agreements are for a longer period. Long-term contracts assist both the franchisee and the franchisor to be protected. A franchise agreement is fairly costly, so you should protect your investment by signing a long-term deal. The terms and conditions for renewal are also included in this agreement.
  13. Renewal rights/Termination of Agreement: Some franchisors include a buyback clause in their agreements. It assists them in purchasing it at a suggested price or matching the terms of the business owner's offer. The franchisee will be shown how to extend or terminate the contract in the franchise agreement. Similarly, with the assistance and advice of both parties, the Agreement can be completed with a mutual decision.
  14. Insurance:The franchise agreement will stipulate that the franchisee must maintain particular insurance during the duration of the franchise. In other words, the franchisee must "indemnify, defend, and hold harmless" the franchisor from any claims, such as damages and expenses, arising from the franchisee's activity. 
  15. Other Conditions:All notices must be sent by the Franchise Agreement, and they are presumed to have been properly provided after they are completed and written. In addition, the Franchisor should ensure that all of its employees are covered by worker's compensation insurance.

People Also Read This: Types of Franchise Business Models

Some Common Franchise Terms

Some of the most commonly used franchise terms are:

  • Franchisee- The person or company that gets the right from a franchisor to do business under its trade name or trademark.
  • Franchisor- The person or company grants a franchise the right to do business under their trademark or trade name.
  • Area Development Franchise- A franchisee with an area development franchise has the authority to open more than one unit inside a certain area for a set period.
  • Disclosure Document- A potential franchisee receives a disclosure form from the franchisor. The document includes information about the franchisor, the franchise being provided, and the terms and conditions of the franchisee's legal relationship.
  • Initial Investment- The money needed for a new franchisee to open and operate a store for at least three months. This must include all "starting" costs, but it is not always indicative of ultimate investment.
  • Master Franchise- The franchisee has more rights under a master franchise agreement than an area development agreement. The master franchisee, in addition to having the right and obligation to open and operate a specified number of units in a defined area, also can sell sub-franchises to other people inside the territory.
  • Multi-unit Franchise- A multi-unit franchise agreement is one in which the franchisor allows a franchisee to open and operate more than one unit.
  • Single-unit Franchise- A single-unit franchise agreement is one in which the franchisor offers a franchisee the right to open and run one franchise location. This is the most basic and popular sort of franchise.

Franchise agreements are complex and it is pertinent to know the terms and conditions commonly used to draft a good franchise agreement.

Types of Franchise Business Models
Startup

Types of Franchise Business Models

Franchising is a form of business model where the owner of a business (known as franchisor) grants an individual or group of individuals (known as franchisee) the permission to operate under the brand, trademark & the business model owned by the franchisor.

Different Types of Franchise Models

There are 4 types of franchise models:

  1. Company Owned Company Operated (COCO)
  2. Company Owned Franchise Operated (COFO)
  3. Franchise Owned Company Operated (FOCO)
  4. Franchise Owned Franchise Operated (FOFO)

Franchise structure differs across these various franchise models.

People Also Read This: A Detailed Agreement To Franchise Your Business

Company Owned Company Operated (COCO) - COCO is a model where the franchise store unit is owned by the brand and is run by the brand. It has nothing to do with franchising in the least. As a result, the franchise is funded entirely by the company. Employees of the brand run the franchise. Example: Reliance Jio Mart, Bigbazar.

Company Owned Franchise Operated (COFO) - This is where the company invests in the franchise business and the franchisee runs it according to the company's guidelines. This is unusual and uncommon in the market because most businesses that invest in expanding their operations choose to do so by themselves. Example: call centers that handle calls on behalf of a company.

Franchise Owned Company Operated (FOCO) - The franchisee is the one that owns the property and is responsible for all additional capital expenditures. The store/outlet operations are managed by the franchising company. It is also known as Franchise Invested Company Operated. Example: Bistro57.

Franchise Owned Franchise Operated (FOFO) - The company gives the franchise investor its brand name in this FOFO model. They do so in exchange for a non-refundable (franchise fee) and a pre-determined period. The brands decide on the prices and items for the outlet. As a result, the franchise investor is the store's owner, and the franchise must bear all operational costs. Also, the Franchise is required to pay the Brand a percentage of income (royalty). This model is the most used in the marketplace.

Advantages and Disadvantages of Franchise Model

The various structures and models of franchise business in India have their advantages and disadvantages. Let us discuss the benefits and cons of each franchise model:

COCO Model:

Advantages of COCO model:

  • The entire profit goes to the company because there is no channel partner to share it.
  • It allows the company to expand in locations where franchisees are hard to come by.
  • Helps a company in showcasing its outlet and product range.

Disadvantages of COCO model:

A corporation spends time and money on activities that are not its core business, such as owning and managing a store.

COFO Model:

Advantages of COFO model:

  • No operational expenses to bear.
  • High productivity and efficiency because the outlets are managed by an entrepreneur.
  • A company can open its outlet in the areas where it is not finding the franchisees.

Disadvantages of COFO model:

  • A franchisee is in charge of the customer experience. If it isn't appropriate, the company's name will be harmed.
  • If a franchisee leaves, the company may be at a loss regarding what to do next.

FOCO model:

Advantages of FOCO model:

  • Better customer handling as the customer experience is in the hands of company.
  • Company does not pay for set-up expenses, franchisee does not pay for operational expenses.

Disadvantages of FOCO model:

  • Not suited for those planning to rent property to become a franchisee.
  • Due to the franchisee's lack of involvement in day-to-day operations.

FOFO Model:

Advantages of FOFO model:

  • A variety of franchise opportunities to choose from.
  • Excellent return on investment on a successful franchisee.

Disadvantages of FOFO model:

  • Higher failure rate compared to other franchise business models.
  • This franchise concept is seen by some franchisors as a quick way to success. As a result of the hefty franchise fees and other investments, the return on investment time may be undesirable.

People Also Read This: Get Your Documents Drafted By Expert Corporate Lawyers

Hybrid Franchise Model

In the world of franchise business models, hybrid franchising is relatively new. It is a hybrid franchise platform that combines physical and digital franchises. Traditional enterprises are digitally turned into a multi-functional hybrid franchise platform.

In brief, hybrid franchising involves digitizing a traditional brick-and-mortar franchise and combining it with other business concepts. Several teams and business models collaborate to assist franchisees in growing their businesses.

A hybrid business model combines elements of single proprietorship with those of a larger corporation. It enables a business owner to expand their own company while working within the concept and structure of a larger corporation. Individuals buy the rights to utilize their brand name, systems, logo, and model from franchise owners, allowing them to start their enterprises.

In a more modern sense, a hybrid business refers to a company's efforts to advertise its main products in a variety of contexts. This business model can include running a brick and mortar store while also keeping an internet store and employing catalogue sales to generate orders via the mail. Typically, the hybrid company will have its warehouses to manage orders received through the mail and those received through the internet site. This brick and mortar back end operation may be outsourced to order fulfillment providers in some situations as a strategy to reduce overall operating costs.

Partnership Agreement Between Two Companies
Agreement & Contract

Partnership Agreement Between Two Companies

Two companies may enter into partnership agreements for mutual services. A Service Agreement governs the provision of services in exchange for payment or other value. Any person or organisation that delivers services can use it. Some examples are people or entities involved in the construction and electrical trades and coaching, personal training, consulting, and professional services. The Service Agreement will specify the scope of work and completion dates, payment terms, and dispute resolution procedures.

While Service Agreements make it easier to resolve issues, they also help to prevent many of them from occurring in the first place. They accomplish this by requiring the parties to discuss and record the important features of the agreement up front, which is why a formal service agreement is necessary. Suppose parties do not sign into a formal agreement for services and instead rely on oral agreements. They may miss important elements such as when payment is due, procuring materials and payment.

Business Agreement Between Two Companies

While there is no universal agreement on how to document commercial transactions, it is generally a good idea to do so when the transaction is complicated to establish otherwise. A commercial arrangement is private, with no government or public involvement. Mortgages, leases, and other secured transactions are exceptions to the rule.

A partnership between two companies can be formed for a variety of reasons. When one firm wants to offer raw materials to the other company within the contract conditions, for example, two companies can agree. Both parties must sign these contracts, which must be in writing. If one of the parties fails to comply with the contract, the courts can enforce the agreement for compensation.

People Also Read This: What does Indemnity In Service Contracts mean?

Business Partnership Agreement Between Two Companies

There can be various partnership arrangements between companies. Some of these are:

  1. Limited company partnership agreement: A limited company partnership agreement is a contract between two or more partners that sets out the terms and conditions of a commercial collaboration. It also outlines the partnership's terms. This agreement can assist protect the partners and the company's success. The agreement will also aid in the definition of the company's goals and objectives.Creating a partnership agreement before establishing a business will assist the partners avoids problems and miscommunication. Creating a written partnership agreement demonstrates your desire to form a formal partnership. If the company does not have a partnership agreement, the state's default partnership will be used. The partners can decide on different details that the state automatically applies by signing a partnership agreement. If a partnership agreement is not written, obligations may develop unexpectedly.
  2. Partnership contract between two companies: A partnership agreement is a contract between two or more company partners that specifies each partner's responsibilities, profit and loss sharing, and other general partnership rules, such as withdrawals, capital contributions, and financial reporting.
  3. Strategic partnership agreement between two companies: A strategic partnership is a business partnership between two companies usually established through one or more contracts. Unlike a legal partnership corporation, agency, or corporate affiliate arrangement, a strategic partnership is usually non-binding. Strategic alliances can take several forms, ranging from handshake agreements to contractual cooperation to equity alliances, which might include the formation of a joint venture or cross-holdings in each other.

People Also Read This: Joint Venture Agreement Format & Required Documents in India

Partnership Agreement Requirements

A partnership must have at least two owners who share in the company's profits and losses. Without the submission of formation documents, partnerships can establish automatically. Every partnership should have a formal partnership agreement that outlines the business's rules and regulations.

  1. Responsibilities of Partners- Written partnership agreements help partners prevent disagreements and conflicts that could lead to the company's demise. The partnership agreement should spell out the partners' rights, responsibilities, and obligations. The partnership's governing document is the agreement.A partnership that does not have a written agreement is subject to the state's default rules. The name and location of the business and the reason for founding the company must all be included in a partnership agreement.
  2. Financial Aspects of Partnerships- Each partner's name and address and contribution to the firm must be included in the partnership agreement. Contributions can be made in money, property, or services. The agreement must specify how the partners intend to split the earnings and losses of the business. An investor partner, for example, could receive a percentage of the earnings each year and/or a stake in the company. In other circumstances, partners may be compensated and profit-shared.
  3. Departures of Partners- According to Reference for Business, the buy-sell section of the partnership agreement must specify how and when departing partners are rewarded. The amount of compensation payable to a partner who leaves the business must be specified in the agreement.
  4. Other Partnership Considerations- Partnership agreements should specify whether a single partner can bind the business or whether numerous partners' consent is required to enter into a contractual transaction. The partnership agreement must include the name and address of each partner who has access to the partnership's bank account. A partnership agreement must include a description of the method for resolving tied votes.
How to Break a Non-Disclosure Agreement?
Agreement & Contract

How to Break a Non-Disclosure Agreement?

A Non-Disclosure Agreement ("NDA") is a legally enforceable agreement that falls under the ambit of the Indian Contract Act, 1872, which serves as the umbrella legislation for all contracts and agreements. This agreement protects and maintains the confidentiality of vital information disclosed between the parties, including trade secrets.

NDAs are also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), secrecy agreement (SA), or non-disparagement agreement.

NDA protects a company's trade secrets or confidential information from being exposed to competitors or unauthorized parties who could use the information to damage the disclosing party irreparably. The disclosing party who shares confidential information with the receiving party agrees on what is considered confidential and not when they sign the agreement.

NDAs maintain the secrecy of information shared between the two parties and overall protect the business's intellectual property. The first step of the negotiations frequently presupposes the disclosure of various types of information. This necessitates that the parties remain bound by the NDA and do not violate it, as it may result in legal consequences.

What happens if you break a non-disclosure agreement?

An NDA violation is a civil wrong. NDAs are legally binding agreements. When the parties sign a NDA, the receiving party must keep the confidential information secret. However, if the receiving party chooses to disclose confidential information to a third party or an unauthorized entity, the party will face legal consequences or penalties.

NDAs not only bind the parties to keep confidential information private, but they also include legal remedies and penalties for any breach of the agreement, such as injunctions, indemnification etc. Breach of NDAs can result in significant monetary penalties, in addition to injuntive remedies.  One should read a NDA very carefully before signing the same.

Why you should not violate a non-disclosure agreement?

NDAs deter persons from disclosing sensitive information to third parties or the general public, and severe penalties accompany them. In many circumstances, the agreement will specify the consequences of breaking the NDA. The following are some instances of penalties for violating an NDA: injunction, indemnity, damages, termination from employment, loss of business reputation, clients, etc.

A NDA would typically contain language that would entitle the Disclosing Party to resort to any legal remedies it deems fit. Such wide language in itself should sound a warning bell to the Receiving Party. It is better to comply with confidentiality obligations than breach a NDA.

Non-Disclosure Penalty Clause

It can be difficult to estimate the damages resulting from a breach of the confidentiality clause, as a result, a penalty clause that provides an appropriate value for the damage resulting from a contractual non-fulfilment may be beneficial. There is an added advantage of this clause if the penalty is already specified in the agreement, then there will be a fear of having to pay heavy damages, which would not exist if the party planned to strictly comply with the contractual obligations.

The penalties for violating the agreement are often laid out in the agreement, including injunction, indemnity, and damages. It is essential to mention that the Specific Relief Act of 1963 and the Code of Civil Procedure, 1908 govern these preventive reliefs.

People Also Read This: Employee Confidentiality and Non-Disclosure Agreement for Employees

Injunction

The non-breaching party may seek an injunction from the court to prevent the Receiving Party from sharing such confidential information. The purpose of applying for an interim or permanent injunction is to prevent the defendant (that is the Receiving Party) from committing any future breaches or causing any other form of harm to the aggrieved party (the Disclosing Party).

Indemnity

The Receiving Party must indemnify the Disclosing Party for any fees, expenses, or damages incurred by the Disclosing Party due to any breach of this Agreement's provisions. Court fees, litigation costs, and actual, reasonable attorney's fees are all included in this obligation.

People Also Read This: What Is A Non-Compete Clause In An Employment Contract?

Damages

If the Receiving party violates an NDA, the Disclosing Party may file a lawsuit in court to prohibit additional disclosures and sue the violating party for monetary damages.

To conclude, NDAs are low-cost, simple-to-create legally binding agreements that keep private information secret between two or more parties. It is critical to be as specific as possible when drafting an NDA so that all parties understand what can and cannot be disclosed and the penalties for disclosing information. An agreement can be void if the language is overly broad, unreasonable, or onerous. The courts will also challenge or invalidate agreements that are unduly broad, oppressive, or attempt to contain non-confidential information. Also, if the information is made public, the Disclosing Party cannot enforce a NDA.

Always have a lawyer review an NDA before you sign the same. Look out for onerous terms and be very careful before putting your name to it.

Partition Of Property Under Hindu Law
Property

Partition Of Property Under Hindu Law

Partition is the process of division of property. The Hindu Succession Act, 1956 ("Act") regulates the partition of property under Hindu Law. 

There are two types of partitions under the Hindu Succession Act. 

  1. Self-Acquired Property 

  2. Ancestral Property 

Property obtained by someone in their lifetime and not inherited from their ancestors is Self-Acquired Property. On the other hand, Ancestral property is property inherited from one's forefathers. Further, Succession itself is of two types: Testamentary Succession and Intestate Succession. 

  1. Types of Succession

As noted, Succession can either be Testamentary or Intestate. Testamentary Succession occurs if there is a will. As long as the will is valid and enforceable, the will has to be executed, and the inheritance provisions do not apply. Part VI of the Indian Succession Act, 1925, further elaborates on provisions related to wills. The will should be clear, reduced to writing, signed by the testator and two independent witnesses. 

By contract, Intestate Succession is primarily covered by the laws of inheritance. For Hindus, these are governed by the Hindu Succession Act, 1956. 

  1. Rules of Succession under Hindu Law

Succession itself depends on whether the property is a self-acquired property or an intestate property.

  1. Succession of Self-Acquired Property

Self-acquired property is also known as coparcenary property. Individuals only have an "interest" in such property, and they receive a share in the property if they have an interest in it. Thus, the "devolution of interest" is an important concept.

People Also Read This: Supreme Court Judgments On Ancestral Property

Section 6 of the Act comprehensively discusses the devolution of interest in cases of the death of a Hindu male. The property will devolve to all coparceners within the dictates of Mitakshara law. However, the Act is progressive and has included women and female heirs within the coparcenary. 

  1. The succession of Ancestral Property

The rules of property division are given under Chapter II of the Hindu Succession Act, 1956.

A Hindu male's basic rules of Succession are codified under Sections 8 and 9 of the Act. Under these provisions, the order of Succession is as follows:

Relatives specified in Class 1 > Relatives specified in Class 2 > Agnates of the deceased > Cognates of the deceased. 

The Succession is exclusive. This means that if there are any Class 1 heirs, they will all receive a share in property and exclude heirs from other categories. If there is no class 1 heir, then all members of Class II will exclusively receive an a of the property, and so on. This is the order of Succession clarified in Section 9 of the Act. 

The list of relatives under Class I & II are mentioned under the Schedule to the Act. Class I heirs primarily include the son, daughter, mother, etc. – Usually, the deceased's closest relatives. Class II heirs are more distant but somewhat related: they include the father, son's daughter's son, son's daughter's daughter, and so on. Sections 10 and 11 state the rules of Succession for Class I and II heirs.

The property of an intestate shall be divided among the heirs in class I of the schedule by the following rules- 

Rule 1: The intestate of window (s) shall take one share each. 

Rule 2: The surviving sons and daughters and the mother shall take one share each

Rule 3: The heir in the branch of each pre-deceased son or daughter shall take one share between them. 

This is also applicable to Class-II heirs.

People Also Read This: How to Inherit Property in India?

Finally, property devolves to cognates and agnates. A cognate is any blood relative from the mother's side, while an agnate is any blood relative from the father's side. While both Class I and II heirs receive equal shares, Section 12 of the Act mentions the hierarchy in Succession among the cognates and agnates. 

For females, similar rules are followed. These can be found under Sections 15 and 16 of the Hindu Succession Act.