Overview of documents required to set up a Franchise
If you are thinking of setting up a franchise, remember it’s a legal business and you need to know about its legal registration and documents required before setting up any franchise.
Franchising is regulated by federal and state franchise laws. This business revolves around a contract between the franchisor and the franchisee. In order to start this legal relationship business entrepreneurs need to check out its legal registration and documents.
Before an entrepreneur goes through a legal registration process, the person should be fully aware of what kind of company the person is interested in, whether a partnership, sole proprietorship, or a limited company. Different companies have different registration procedures, however, their beginning procedure is the same. Every brand provides an online basic information form on their official website for the ones who want to get connected. Interested entrepreneurs need to fill in basic requirements like name, address, interested country, phone and other small steps before submission. Once it’s all done, interested candidates will get an introductory call and the legal registration process with the franchise will gain momentum.
Legal Registration includes selecting a franchise business, franchise formalities, ownership, licensing, currency risks, licensing, tax, and much more.
Franchise formalities: once you are done with selecting a franchise business, next is you need to minimize the complications in the primary stage, for this, you need permission from MCA (Ministry of Corporate Affairs) and if the franchise is operating outside India, then hire a professional team and overcome the initial complications.
Ownership: once you are done with addressing the formalities, now it’s time for legal ownership. To avoid ownership obstacles in the future you need legal processing and legal witness.
Licensing: license depends upon the type of business, different businesses provide different types of licenses and this licensing is the important registration process in the franchise system.
Read More: How Many Types Of Franchises Are There?
The franchising documents needed to state a legal relationship of franchising are as follows
- (FDD) Franchise disclosure document
- Franchise Agreement
- Franchise operations manual
- Registration Applications and Notices
- Financial Statements
Read More: How To Choose The Right Franchise?
Franchise Disclosure Document
FDD franchise disclosure documents are very important to be reviewed by an entrepreneur who is interested in franchising. This document provided information regarding the franchise you are going to invest in. The person who is going to sign a franchise agreement and is looking to become a franchise owner should review the FDD of the brand.
FDD is a legal document of a franchise that includes many different types of disclosure items that disclose inside information of a company. The FDD must act in accordance with federal and state franchise laws and this legal document should be prepared legally or by a franchise lawyer.
This legal document is very important for both franchisors as well as for a franchise because without this document neither a franchisor can sell the franchise nor can a franchisee get a deep understanding of the company. As per FTC (Federal Trade Commission), a franchisor needs to provide FDD to a prospective franchisee within 14 days before signing a franchise agreement. But this time period varies according to the location because some states have added many different laws regarding the issuance of the FDD.
In India, there is no law at present regarding franchised governed business, therefore this business largely remained confined to contractual agreements. Thus, franchise agreement is very important in this business journey in order to execute many different operations and other laws that impact franchise business. Indian Contract Act, of 1872 has been made in order to see all such business activities.
The franchise Agreement starts a relationship between the franchisor and the franchisee. This legal agreement grants permission to franchisees to operate the business of franchisors. Under this agreement, franchisors grant franchisees the legal right in establishing and opening a franchised business. Franchise agreement protects the franchise system, and safeguards the integrity of the franchise system.
Franchise agreement contains primary rights and obligations which are as under
Right to Develop and Operate: franchise agreement gives the right to franchisees, to develop and operate a franchisor’s business. Under this agreement legal rights and licenses are issued, and access to trademarks and business models is also provided. This agreement gives the right to franchisees to use and duplicate the business of the franchisors.
Initial and ongoing fees: Under this agreement, ongoing franchisees are required to pay initial franchise fees and different ongoing fees to the franchisor. And in response to this franchisor is required to provide many different business procedures and models that can help franchisees become successful.
Support: This agreement helps franchisees in getting different types of support from the franchisors. Franchisors need to provide support, training programs, and benefits and need to maintain or improve the franchise system.
Territory protection Rights: franchise agreement gives franchisees the right to operate a location under franchised business. It gives territory protection rights to franchisees.
Franchisor’s Obedience: franchisees need to remain stuck with the Franchisor’s Standards and Specifications. While operating and developing business standards the franchisees need to comply with the requirements provided by the Franchisors.
Term agreement: term agreement varies from franchise to franchise, once the agreement comes to an end, the franchisee can also renew it according to the term agreement under a franchise agreement. This term agreement gives rights to the franchisees to run the location of a brand under a specific period and once the time of term agreement is over, a franchise can apply for the agreement renewal.
Franchise Operations Manual
The franchise operations manual is confidential in nature and is termed the DNA of a franchise system. It takes care of the brands consistently and focuses on the details of the business. Franchisors deliver Operations Manual in the form of e-mails, letters, leaflets, documents, or through any other medium.
Franchisors can change, update and modify the manual according to the new trends and techniques in the franchise business system.
The manual provides information to franchisees regarding the standards and requirements of the franchise system. It is a kind of franchisor tool that is necessary for informing franchisees regarding training, support, and other systems standards. It helps in implementing legal obligations within the business.
- Franchise operations manuals track and ensure uniform customer experience meaning every customer is experiencing the same services and products. It also controls quality across each location. Franchisees use it as a training tool and it also ensures the agreement between franchisor and franchisee.
- It is a daily reference tool for franchisees, training franchisees to operate a business and providing them knowledge regarding franchised business. It also minimizes the percentage of questions that franchisors have to answer.
Registration Applications and Notice
It’s important to fill franchise registration applications with the states that are franchise registered, these states are known as franchise filing states. Franchisors have to register applications to inform the state where the franchise business is going to be set up. In the registration application, franchisors have to inform the state from where the franchise sales activity will occur. The notice will advertise the franchise locations and where the franchise company operates.
- Registration Applications and Notices are not expensive and are quite fast.
- Each state varies in registration applications and notices.
- FDD registration with departments varies from state to state.
Financial statements are the final documents needed to start a franchise. To know the company deeply and evaluate its financial track record franchisors have to include financial information within FDD. By law, they have to give specific financial information in financial statements like costs, revenue, income, sales, and profit margin, so franchisees should know about the finance and financial risks before making any investment.
Financial statements conduct official financial information within FDD and keep a record of the company’s locations and other owners’ outlets. Financial statements should include data and records of the last 3 years of the company. In case the company is new then its financial statements will provide only limited financial information.
Financial statements mainly include
- Balance sheets: these highlight what a company owns and what it owns at a fixed point in time.
- Income statements: these show the income of a company, and how much money it’s making and spending.
- Cash flow statements: it’s regarding money exchange between the company and the outside world.
- Statements of shareholders: what changes came in the company’s shareholders?
This legal business relationship needs the above-mentioned registration process and documents to start a franchise. The legal registration requires franchise identification, franchise formalities, licensing, tax, and other requirements. Important documents that are required during this process are the Franchise disclosure documents, Franchise Agreement, Franchise operations manual, Registration Applications, and Financial Statements. All these legal registration and documents are explained in this guide.
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