The next few years will be very important for franchising in India. The government’s initiatives in increasing Foreign Direct Investment (FDI) in multi-brand retail(Wal-Mart, Carrefour) to 51 per cent and single brand retail( Ikea, Starbucks) to 100 per cent has helped this industry. Franchise opportunities are available in a multitude of businesses.The International Franchise Association (IFA) states that there are more than 75 different industries which make use of this system.
In India the franchise market is clocking an impressive growth rate of 30 per cent per year and the figures are pegged anywhere between USD4 billion to USD8.5 billion. 25 per cent of the two million franchises are international in origin and U.S. franchises are the most dominant.
Global retail and restaurant chains are looking for partners to expand in India. Malls are lucrative places for a franchise set-up because there is a lot of customer traffic and mall shoppers are prime targets in domains like fast food and entertainment. Franchising has enabled the brands to increase their presence in Tier 2 and 3 city malls also. Having a franchised outlet in a mall has an added advantage as the maintenance of surroundings, parking lots, electricity and security is not the headache of the business owner. With multiplexes galore and a favored place for the youth to hang out malls seem to be a sure bet for a franchise to make profits.
Steps to ensure success
First- How it works
Franchising is establishing a relationship with a successful business, using its systems and rules andcapitalizing on its brand awareness to gain profits. It is not an independent business and most business logistics are all detailed and have to conform to consistent quality standards.The franchiseagreement will stipulate the initial fees, royalties, territory restrictionsandoperational support provided.
In a normal franchise agreement, there is
(a) The franchisor, who lends his trademark or trade name (or other intellectual propertyrights) and the business system
(b) The franchisee, which pays a royalty and often an initial fee for the right to do businessunder the franchisor’s name and business system.
The franchisor generally drafts the terms but it isadvisable to take the assistance from reputed law firms withfranchise experience. Terms should be reasonable for your business to be successful.Every franchising relationship is a contractual relationship and therefore, the Indian Contract Act, 1872 (“Contract Act”) would be applicable to all franchising arrangements.
Second-Check before you sign on the dotted line
1) Consumer Protection and Product Liability
Under the Consumer Protection Act, 1986, a consumer can file a complaint with theconsumer forums for unfair or restrictive trade practices.Both the franchiser and the franchisee could be held liable for any defective goods orservices supplied by the franchisee. Make sure provisions to minimize such risks are properly documented in the agreement.
2) Unfair Trade practices
In India, the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) prohibits monopolistic trade practicesand restrictive trade practices. The franchisor or franchiseemust ensure that their practices do not classify as monopolistic or restrictive.
3) Exchange Control issues
An international franchise arrangement would have to comply with the Foreign Exchange Management Act, 1999 (“FEMA”). No prior Government approval is required for royalty payments up to two percent for exports and one percent for domestic sales on use of the trademarks and brand name of the foreign collaborator. In case the franchisee and franchisoralso have a technology collaboration agreement, then royalty upto five percent on local sales and 8% on exports, and lump sum payments not exceeding USD 2 million arepermitted without approval.
And Finally-Check the costs
• Rent, security and utility deposits
• Service tax, VAT, Income Tax
• Legal and Accounting fees
• Interest on bank loans, insurance premiums
• Travel and expenses when attending the franchisors required training programs
• Employee benefits and payments
• Lease vs. owned shop