lyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of b

Multiple factors encourage the global brands to enter into master franchising arrangements for India including benefit of acquaintance of the master franchisee with local environment; local sales and marketing expertise of the master franchisee; ready availability of sales and marketing channels; reduced investment; sharing of expenses; negligible government approvals; no requirement to recruit local workforce and consequently lower financial risk. Further, the regulatory restriction on retail trading by foreign companies is a major factor for boom of master franchising arrangements in India.

Master Franchising Agreements:

Due to the nature of the business and consideration involved, the Master Franchise Agreements are fairly complex documents. A typical master franchise arrangement enables the master franchisee to develop the business in the territory under the franchisor’s brand name and trademark with or without permission to manufacture the products locally, provides guidelines for operation of business and specifies returns for the franchisor. Depending on the arrangement, a Master Franchise Agreement would ordinarily govern:

· Permission and restrictions on use of trademark within the territory;

· Transfer of technical know how concerning manufacturing, advertising or marketing;

· Financial returns to the franchisor, including royalty and fee for services;

· Appointment of sub-contractors to manufacture and sub-franchisee to sell the products at different locations within the territory;

· Control over the sub-contractors and sub-franchisees through master franchisee;

· Manufacturing process including approval of samples and quality control;

· Provision of dedicated staff by the franchisee;

· Appearance of the franchise stores and training of sales executives;

· Annual market penetration targets;

· Minimum stock purchase/import obligations;

· Joint marketing, sharing of advertising cost and support by the franchisor;

· Periodic reporting by the franchisee;

· Duration, renewal or termination of the arrangement;

· Events of default, pre-termination notice to correct, termination, etc.;

· Exit options, if any or both parties do not wish to continue;

· Post termination obligations including assignments of trade contacts; return/destruction of advertising material, liquidation of unsold inventory, raw material and destruction of sub-standard products, if any;

· Provisions governing confidentiality, warranty, intellectual property protection and insurance.

The rightful consideration of the brand name owners to establish and maintain market reputation compels them to stage-wise describe the inherent processes and prescribe their participation in crucial decisions.

Formalizing a Master Franchise Arrangement:

Most franchisors usually provide their standard Master Franchise Agreement to start with and ask the franchisee to suggest revisions (though they may not appreciate many revisions by the franchisee in the interest of uniformity of standard agreements across all territories).

From a contractual standpoint, while formalizing the agreements, a franchisee must try and bridge all potential gaps by identifying and analyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of b

anchisee to develop the business in the territory under the franchisor’s brand name and trademark with or without permission to manufacture the products locally, provides guidelines for operation of business and specifies returns for the franchisor. Depending on the arrangement, a Master Franchise Agreement would ordinarily govern:

· Permission and restrictions on use of trademark within the territory;

· Transfer of technical know how concerning manufacturing, advertising or marketing;

· Financial returns to the franchisor, including royalty and fee for services;

· Appointment of sub-contractors to manufacture and sub-franchisee to sell the products at different locations within the territory;

· Control over the sub-contractors and sub-franchisees through master franchisee;

· Manufacturing process including approval of samples and quality control;

· Provision of dedicated staff by the franchisee;

· Appearance of the franchise stores and training of sales executives;

· Annual market penetration targets;

· Minimum stock purchase/import obligations;

· Joint marketing, sharing of advertising cost and support by the franchisor;

· Periodic reporting by the franchisee;

· Duration, renewal or termination of the arrangement;

· Events of default, pre-termination notice to correct, termination, etc.;

· Exit options, if any or both parties do not wish to continue;

· Post termination obligations including assignments of trade contacts; return/destruction of advertising material, liquidation of unsold inventory, raw material and destruction of sub-standard products, if any;

· Provisions governing confidentiality, warranty, intellectual property protection and insurance.

The rightful consideration of the brand name owners to establish and maintain market reputation compels them to stage-wise describe the inherent processes and prescribe their participation in crucial decisions.

Formalizing a Master Franchise Arrangement:

Most franchisors usually provide their standard Master Franchise Agreement to start with and ask the franchisee to suggest revisions (though they may not appreciate many revisions by the franchisee in the interest of uniformity of standard agreements across all territories).

From a contractual standpoint, while formalizing the agreements, a franchisee must try and bridge all potential gaps by identifying and analyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of b

facturing process including approval of samples and quality control;

· Provision of dedicated staff by the franchisee;

· Appearance of the franchise stores and training of sales executives;

· Annual market penetration targets;

· Minimum stock purchase/import obligations;

· Joint marketing, sharing of advertising cost and support by the franchisor;

· Periodic reporting by the franchisee;

· Duration, renewal or termination of the arrangement;

· Events of default, pre-termination notice to correct, termination, etc.;

· Exit options, if any or both parties do not wish to continue;

· Post termination obligations including assignments of trade contacts; return/destruction of advertising material, liquidation of unsold inventory, raw material and destruction of sub-standard products, if any;

· Provisions governing confidentiality, warranty, intellectual property protection and insurance.

The rightful consideration of the brand name owners to establish and maintain market reputation compels them to stage-wise describe the inherent processes and prescribe their participation in crucial decisions.

Formalizing a Master Franchise Arrangement:

Most franchisors usually provide their standard Master Franchise Agreement to start with and ask the franchisee to suggest revisions (though they may not appreciate many revisions by the franchisee in the interest of uniformity of standard agreements across all territories).

From a contractual standpoint, while formalizing the agreements, a franchisee must try and bridge all potential gaps by identifying and analyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of b

b-standard products, if any;

· Provisions governing confidentiality, warranty, intellectual property protection and insurance.

The rightful consideration of the brand name owners to establish and maintain market reputation compels them to stage-wise describe the inherent processes and prescribe their participation in crucial decisions.

Formalizing a Master Franchise Arrangement:

Most franchisors usually provide their standard Master Franchise Agreement to start with and ask the franchisee to suggest revisions (though they may not appreciate many revisions by the franchisee in the interest of uniformity of standard agreements across all territories).

From a contractual standpoint, while formalizing the agreements, a franchisee must try and bridge all potential gaps by identifying and analyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of b

lyzing maximum “what if?” situations. Attempt to consider the scheme of arrangement detailed in the agreement vis a vis your financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. The practicality of targets and schedules is essential to avoid a default situation later on.

From a financial standpoint, while analyzing initial and running costs, the franchisee should include the costs of acquiring the requisite technical know-how and skills to operate the business; import of initial inventory; transportation of material; establishment, lease rentals and maintenance of franchise stores; translation/adaptation of manuals; local market research; salaries and professional fees. The franchisee may seek flexibility over payments to the franchisor and modification of business and other targets from time to time.

From the standpoint of foreign exchange regulations, an Indian franchisee can remit royalty towards license of trademark upto the amount of 1% of domestic sales and 2% of exports without prior government approval. If the licensor also provides technical know how to the Indian licensee, the Indian company can remit royalty upto 5% of domestic sales and 8% of exports and lump sum payment of upto US$ 2 million without prior government approval. In case both trademark license and technical know how are provided, the payment for technical know how subsumes royalty for trademark license. Payment of royalty above the percentages specified above would need prior government approval.

The Indian franchisee shall also review the agreement from the standpoint of efficient tax structuring. In view of the wide definition of the term “franchise” for purposes of service tax, the fee payable under a typical Master Franchise Agreement would attract service tax. Further, if the agreement prescribes for transfer of technical know how to the franchisee, or any special service required for any purpose including designs, drawings, publications and provision of technical personnel, the corresponding payment may be subject to research and development cess.

In certain arrangements it may therefore be advisable to separately specify the trademark license fee and royalty, franchise fee, fee for technical know how, etc. Separate agreements may reflect a less complicated picture of payment structure thereby avoiding tax disputes. However, in view of complexity of the issues involved and the potential financial and legal exposure, due care and caution must be exercised by the franchisee while formalizing Master Franchise Agreements and assistance from professionals or colleagues having working experience of licensing agreements is advisable.