All You Need to Know About Franchise Business

Franchising basically consists of a business owner or the franchisor licensing towards a third party or the franchise, the right of operating commerce or distributing the products or services using franchisor’s brand for a settled time period in return for a fee.

Steps to Start a Franchise Business

Reaching out to the selected Franchisor – One must consider that every franchisor has different needs relating to documentation, fees, and business arrangements. In case the details are provided on their website, there may be additional information which has been not disclosed and talking to the franchisor directly may help you to keep yourself knowledgeable.

Preparing and arranging the needs – This is a vital step. The needs which you will be asked to give could state whether or not the franchisor may approve the franchise application, so you should give proper consideration to this step.

Many franchisors have defined a set of requirements. The documents which are most common are:

•    Franchise application form which is required to complete in full, which you could find on the franchising corporation’s website. If the form isn’t available, one can contact the corporation and get it from them.

•    Letter of Intent (LOI), which specifies the reasons for applying for the said franchise.

•    Map of your planned site of commerce. You can do it with the assistance of maps and you must also attach the photos of the actual site too.

•    Your updated resume or profile.

•    Minimum two valid government ID proofs are needed

•    In case you would be renting the space for the commerce site, the lease agreement or the written agreement with the lessor also requires to be provided.

•    Latest bank statements is necessary

•    Taxpayer’s Identification Number (TIN).

Meeting the Franchisor – Meeting the franchisor is an important step where they consider your application and validate if it is good to go. Franchisors shall evaluate whether you are suitable to be their business partner.

Franchise Agreement Signing – Lastly, if you have passed each of the vital steps, you are going to become a franchise. However, one must give attention and review the Franchise Agreement before signing the agreement. You must also pay attention to the main details as stated below:

•    The term of the franchise which includes the renewal term and costs for the same

•    Costs and charges such as the franchise charge as well as royalty charge

•    The reasons which may lead to termination of the Franchise Agreement

•    Inclusions as well as exclusions in the franchise package

•    List of franchisor-approved goods and suppliers

Legal aspects of the Franchise business

The franchise business in the Indian market is at a rising stage and there is no particular law relating towards the franchise business in India, and thus, it touches a variety of industry-specific as well as business laws in the country. Franchising is administered by several statues as well as rules and regulations. The key rules are:

The Contract Act

The Indian Contract Act, 1872, administers the contractual relationship made amid the franchisor as well as the franchise.

The Consumer Protection Act

The Consumer Protection Act, 1986 furnishes remedies towards the consumers if any defects in goods or services and holding the producer or service providers legally responsible.

The Monopolies and Restrictive Trade Practices Act, 1969

The Monopolies and Restrictive Trade Practices Act restricts the imposition of limits regarding the pricing of goods and sources of supply. It must make certain that the franchising conditions of agreement monopolistic or restricted. The MRTP Act also necessitates registration of the agreements which can comprise restrictive trade practices. The ones pertinent in the context of the franchising business comprise exclusivity in product dealing; exclusive supply provisions; resale price-fixing terms and limits on methods used.

Competition Act, 2002

Following the globalisation of the Indian market, the competition law has moved the consideration from restricting monopolies in the direction of encouraging healthy competition. Few of the provisions are not yet effective. Though, provisions regarding anti-competitive agreements and abuse of dominant position have come into effect.

The Trademarks Act, 1999

The Trademarks Act furnishes the rules and regulations relating to the registration of trademarks as well as service marks.

The Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act and pertinent rules and regulations manage the payments in foreign exchange. Franchising arrangements generally contain payments, for instance, a franchise charge, royalty payments for making use of system as well as trademarks, advertisement contributions, and training charges, which can be remitted towards a foreign franchisor.

Taxation

Where a franchisor obtains royalties, franchise, or service charges, tax is levied and it is required to be paid under the Income Tax Act, regardless of the fact whether the franchisor is Indian or a foreign person. As per Section 9 of the Income Tax Act, some income like interest and royalty are deemed to take place and to increase in India under particular circumstances. The profits made from the business under the franchise business are taxed up to 30%.

There is a withholding tax on fees for technical services as well as the prevailing rate is 10%. However, it is subjected towards the relief provided under a tax treaty, if any.

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Author:

eStartIndia Team