Franchising is a business system wherein a known business owner or institution expands by allowing individuals to invest and open and operate a single unit or multiple units of the same business as the owner runs. The most popular example is McDonald’s with more than 30,000 restaurants worldwide. A good number (50 per cent as revealed by some sources) of them are not owned by the McDonald’s itself but by the franchise owners.
Franchising has a legal binding and both franchisor and franchisee has to abide by the agreed terms and conditions. The most important document in a franchise transaction is the franchise contract, which also has the legal sanction. Franchise contract describes in details the obligations and the imposition on the part of franchisee and franchisor.
Franchise contract is sometimes split in two documents – the Purchase Agreement and the License Agreement.
Purchase Agreement: The purchase agreement defines the total package that is to be provided by the franchisor, the price and the services. The package consists of the necessary equipments required to run the business. In the price is covered the franchise fee and royalty with terms and conditions.
License Agreement: The license agreement is basically the legal proof of the transfer of trademark rights and the use of business model by the franchisee. Other than the rights granted, the document also gives specifications as for the obligations of the franchisor and the franchisee.
Impositions are in the form of trade restrictions. The license agreement gives exclusive rights, as noted in the document, to operate the business in a particular area and for a particular time. The conditions for the termination of the of contract are also included in the license agreement. Further, information on the renewal of agreement is included and provided in this document.