The Legal Framework
for Foreign Franchises in India
20 January 2002, All Rights Reserved.
N T R O D U C T I O N
Franchising in general means granting of certain rights by one party (the
franchisor) to another (the franchisee) in return for a sum of money. The
franchisee then exercises those rights under the guidance of the franchisor.
The above definition is a very general in its nature and encompasses many
different forms of licensing arrangements. The business format of franchising,
being the important one, can be defined as the contractual license granted by
one person (the franchisor) to another (the franchisee) which:
Permits or requires the franchisee to carry on a particular business using
the franchisor’s know-how under the franchisor’s brand as an independent
Allows the franchisor to exercise continuing control over the manner in
which the franchisee carries on the franchised business;
Obliges the franchisor to provide the franchisee with ongoing support in
carrying on the franchised business.
As a commercial matter, the agreement inevitably requires the franchisee
periodically during the period of the franchise to pay to the franchisor sums of
money in consideration for the franchise and / or goods and / or services
provided by the franchisor to the franchisee.
The International Franchise Association (IFA)
defines franchising as a “continuing relationship in which the franchisor
provides licensed privilege to do business, plus assistance in organizing,
training, merchandising and management in return for a consideration from the
Who is a Franchisor?
He is the owner of the franchised system.
It owns the know-how of the concept and the brand name. It grants franchises to
Who is the
He is the one who has been granted the right by the franchisor to carry on the
business using the franchisor’s know-how and the brand name. Now, depending on
the rights granted, franchisee’s can be classified into:
Unit Franchisee – this is the simplest and most common form of
franchising. This franchisee is granted the right to operate one unit or outlet
of the franchised business.
Master Franchisee – He is generally granted the right to a substantial
territory. It will then grant unit franchises to unit franchisees throughout the
territory. The Master Franchisee needs to have sufficient drive and resource to
fully exploit the territory and control the unit franchisees territory.
Regional Franchisee – Ina geographically large area a franchisor, or a
Master Franchisee may decide that it is commercially appropriate to further
divide the territory up with separate regions and grant a Master Franchise for
each separate region. These franchises are known as regional franchises or
sometimes area franchises.
Multiple Franchises – Some unit franchisees operate not just one unit,
but several. These are referred to as multiple franchises and usually have a
large number of individual unit franchise arrangements – one for each unit.
Developers – Large Corporations sometimes prefer to exploit their
territory by opening outlets themselves. These are known as developers. They
have a single developer agreement, which allows them to open many units. These
are pilot operations so that they become fully familiar with the business at an
operational level and can localize it so as to improve its chances of success.
What is Franchise fee?
A fee paid by franchisee to a franchiser. US standard accounting practice
requires that franchise fee revenue should be recognized when all material
service or conditions relating to the sale have been substantially performed or
satisfied by the franchiser.
of Franchising –
Thus, we can sum up the basic elements of franchising as under:
An entrepreneur (franchisor) has developed a system of doing business,
which works and decides to grant to another entrepreneur (franchisee) the right
to use the system.
The two entrepreneurs are legally and financially independent
The granting of the right to use the franchise system involves the right
of the franchisee to use the franchisor’s intellectual and industrial property,
know-how, business and technical methods, procedural system and other
intellectual property rights.
The franchisee in exchange undertakes to follow the methods elaborated by
the franchisor and to pay an entrance fee and / or royalties.
The franchisor retains the right of control over the performance of the
The franchisor undertakes to provide the franchisee with training and
Some general Issues on franchising
Why is franchising growing?
Franchising is one of the world’s fastest growing and most lucrative industries.
Franchise businesses will be turning over an estimated $ 1 trillion (which is
roughly equal to ten times the size of India’s current GDP).
Franchising permits businesses to grow more rapidly than any other method. By
increasing the efficiency by which goods and services are distributed, it brings
impressive gains to any economy. On a cultural level, franchising is one of the
few developments that generate employment, earnings and entrepreneurship at the
same time. It disseminates ownership rights and decision-making power to
thousands of small-unit operators. For developing countries, or countries
shifting to a market economy, franchising has the effect of creating
relationships between one economy and another. It promotes sharing of
technologies, trademarks, marketing, intellectual property and even
Franchising is a particularly good developmental tool in any part of the world
where financial resources are short and the need to simulate individual
initiative is acute. There are no tariff barriers to be dealt with. It puts
little strain on the receiving country’s balance of payments. Thus, not
surprisingly, awareness of the benefits of this business formula is growing at
an international level.
franchising relevant to India?
Franchising affords India an opportunity to build its commercial infrastructure
and develop its domestically oriented businesses in an efficient, profitable and
pan-national manner. It also offers India the opportunity to import and develop
foreign concepts in a way, which ensures that the equity of the business remains
in India, so avoiding the politically undesirable situation whereby successful
domestic businesses are owned by foreign corporations.
attractions of franchising in India are as follows:
Lower Capital Requirements
– Franchising is an excellent way for both Indian and foreign corporations to
expand their businesses and make their brand names known in India without having
to risk large sums of money by way of direct investment. The franchisees finance
the expansion of the business in India. In return they have the opportunity to
make substantial income and capital profits.
Geographical extent of the country
– Franchising can enable a company to take advantage of the vast Indian market
of over 1000 million people and growing at a rate of 1.9% p.a. There is an
ever-growing demand of goods and services such as fast food and beverages,
clothing, electronic goods, computer hardware and software and professional
services. The infrastructure is poor, however, and operating a corporately owned
distribution system that fully exploits the geographical expanse of the country
is extremely difficult and inefficient. Empowering participants in the
distribution system by granting them an equity interest in it (i.e. by granting
a franchise) can substantially improve the efficiency in the distribution
– Franchising well suits the entrepreneurial side of Indian culture. Indian
business people are fiercely proprietary and feel a need to have ownership and
control over their business operations which they can pass on to future
generations. However, at the same time they are keen to benefit from the
goodwill and technology that can be provided by the foreign franchisor.
Franchising allows them to reconcile these conflicting ambitions.
Harnessing local market knowledge
– Indian master franchisees offer the foreign franchisors direct access to
substantial market knowledge and a considered and sophisticated approach to its
exploitation. A company needs a great deal of knowledge of the different
regional markets in India. What holds good for Punjab may not be relevant for
Kerela. Franchising provides a sure and easy way of accessing the right level of
relevant local market knowledge.
The four ‘R’s
American corporate history is replete with instances of franchising’s
outstanding success and also many failures. Learning from them, franchising can
succeed if the franchisee has a right combination of the four R’s prescribed.
– The franchisee should be very realistic in
assessment of his business strengths and weaknesses. Certain key areas where
realism is a must while deciding to go into franchising includes questions like
are you prepared for the financial insecurity, are you capable of developing a
frame of mind when you can smile and be cordial even when the customer is
totally wrong. More important is
the need for realism in evaluating the products and services offered by the
Resources – Many
franchisees, during the early periods of their business when resources
constraints are common, tend to sometimes overlook sending in the royalty
cheques to the franchisor. Franchisors keep feeling and rightly so that their
royalty is as much a key business expenditure of the franchisee as payment for
purchases or payroll is and any delay in handling this area would lead to
unfortunate consequences of a long term nature. Therefore, while planning
resources on a periodic basis, consider the payments that are to be made to
franchisor. Another area where most franchisees have problems is to manage their
resources while living within the franchising system. The franchising agreement,
in most cases, clearly indicates systems, procedures and methods of managing the
resources. The franchisee will do well to either be mentally prepared to accept
the resource management terms of the franchisor or make it clear at the
beginning that he needs the requisite leeway to manage his own resources.
Research – Research on the franchisor is a
must for the success. Various published sources also provide fairly detailed
information on most of the franchises that are on offer but to what extent that
will suffice for the Indian conditions needs serious examination. Whatever be
the methodology, the prospective franchisee will do well to build a
comprehensive information on the franchisor, the products or service of offer,
competing and substitute products and services before he makes any move
committing his financial resources on a long term basis.
Resolve – Resolve to be part of the
franchising system. The problem starts when a person gets into franchising only
because he has an entrepreneurial instinct but the instant he becomes a
franchisee, the true entrepreneur in him starts resenting the shackles that are
imposed by the franchising system. The options are clear – either stay within
the system and fully learn the nuances of the business and prosper or try one’s
fledging entrepreneurial talent and get into trouble.
Purchasing a Franchise?
YOU need to consider a variety of important issues at the time of
purchase of a franchise. In this regard franchise consultants can render
valuable assistance to you on some of the issues, including the
following key areas:
* Evaluation and review
* Personal liability
* Legal issues
A franchise consultant can assist you in a comparative analysis of
various franchise opportunities by reviewing the offering circular of
each franchisor so that you can compare your various rights and
obligations and the strengths and weaknesses of each franchise
opportunity. The best advice a consultant can give you in this regard,
however, is not legal advice but common-sense.
Visit and talk to as many existing franchisees as possible to see how
they are doing. They are already down the road you are thinking of
traveling. Are they making money? How long did it take them to break
even? Did the franchisor fulfill its promises? If the franchisees could
do it all over again, would they still buy the franchise? It may also be
wise to visit the home or regional office of as many franchisors as
possible to get a feel for the quality of their operation firsthand.
Finalization of agreements
Once a particular franchise opportunity is selected, a consultant can
explain to you your rights and obligations under the franchise
agreement. You should understand that your consultant has limited
ability to “negotiate” the deal on your behalf, unlike other types of
business transactions. Most franchise offerings, particularly in
established franchise systems, are offered virtually on a “take it or
leave it” basis. This is due to a natural reluctance to negotiate, a
desire for uniformity, the franchisor’s obligation to disclose the
franchise terms (stating whether such terms are negotiable or
non-negotiable) to all prospective franchisees.
While a sole proprietorship is the simplest form of ownership, a sole
proprietor has his or her personal assets at risk for any liability in
connection with the operation of the franchised business. In a
partnership the partners are jointly and individually liable for the
liabilities of the partnership and for the actions of the other partners
acting within the scope of the partnership.
With a corporation, a shareholder generally will not be liable for the
liabilities of the corporation except to the extent of the shareholder’s
capital contribution. A shareholder’s personal assets are protected.
If you have a substantial estate, you may want to consider certain
estate-planning opportunities to shift any appreciation in the value of
the franchise to your children or grandchildren to reduce your estate
tax liability. This can be accomplished without relinquishing control
over the operation of the franchise by having different classes of
If you are acquiring real property and/or constructing the premises, a
consultant knowledgeable in real estate matters may be desirable. Lease
negotiations can also benefit by having a consultant knowledgeable in
Franchising in India so far?
Franchising in India is at its early stage and neither business people nor the
courts have had much exposure to it. Soft drinks and hotel franchises arrived in
India in the 1960’s, but in the 1970’s and 1980’s, the government expelled
foreign brands from India.
Some international franchises have recently come back to India and are doing
well. Hotel business like Best Western Group and the Quality Inn Group have
established themselves. Also, Walt Disney has been successful in having its
label in all sorts of goods for children, whether they are clothing, toys, and
school equipments. Fast food chains like McDonalds, Slice of Italy, Dominos,
Taco Bell have also come in. Pepsi and Coke have re-captured the soft drinks
A lot of local franchises have also become established. Examples are:
Nilgiris – food retailing chain in the south and currently has 10 franchised
Pizza Corner – Chain of dine-in restaurants and delivery outlets. Plans to open
another 100 franchised outlets over the next 5 years.
Aptech – computer-training business which has some 950 franchised centers.
Blue Dart- a courier company with some 840 franchised outlets throughout India.
In India, we have an association set up which deals with the various issues
emanating form the concept of Franchising. In the following page, we have an
excerpt from the interview of the President of the association.
Franchising Association of India
Mr. C.Y. Pal,
President - FAI
WHILE Franchising, as a way of doing business, has been known in the
country for decades the concept, until recently, was practiced in a very
limited way and in many cases was something for which one used the spare
real estate, or what one’s wife did. With opening of the economy, the
environment for franchising, has in the last few years, undergone a sea
With our vast and inherent entrepreneur talent, franchising is now poised
to help spur the economy as it is an excellent way of encouraging private
enterprise, it fulfills the growing need for connecting the customer
through self-driven localized business partners called franchisees, and
helps in establishment of global standards for products and services. The
practice of franchising is, thus, fast catching up as is evident from the
increasing number of examples we see around us in diverse fields such in
Aptech and NIIT in computer education, McDonalds and Dominos Pizza in
Food, ABF and others in entertainment, DHL and Blue Dart in couriers and
many other examples in healthcare, fitness centres and the like.
Like all business partnerships franchising involves two parties to the
deal i.e. franchisor and the franchisee, while the former provides the
brand, the know-how, the training and the systems for the product or
service the later forms the front end for expanding the business acumen
abundantly available in our country at the grass root level. In order to
reinforce the basis of a mutually beneficial and enduring relationship, it
is vital to ensure that both the parties understand their rights and
responsibilities to work in unison for success of the business.
It is in this context that the Indo American Chamber of Commerce,
supported actively by the United States Foreign Commercial Service in
India and backed by a group of high repute professionals with extensive
experience in the fields of franchising, took the initiative about a year
ago to form the Franchising Association of India (FAI) to provide a forum
for Franchisors, franchisees and other related interests, to promote the
concept of franchising. FAI has since been incorporated as an Association
under the Companies Act and after meeting the rigorous criteria has also
been admitted as a member of the prestigious World Franchising Council
FAI is, thus, the only and exclusive body, which will henceforth represent
the interests of all concerned with franchising in India at the national
and the international level. Membership of WFC also helps to provide FAI
with strong contacts to the Franchising Association of other countries
including the International Franchising Association in the United States.
All these linkages will clearly help to connect the Indian entrepreneurs
with the enormous increase in opportunities for franchise businesses
available all over the world.
The objectives of the Franchising Association of India are:
Encourage and safeguard the business environment for franchising, both
with regard to Franchisors and Franchisees.
Act as a resource centres for current and prospective Franchisors and
franchisees, the media and the Government.
Disseminate knowledge to promote the concept of franchising and to
propagate it as a healthy business practice.
Establish a forum for discussion and deliberation on franchise-related
matters and problems and help promote the interest of members by
organizing seminars, conferences and meetings.
Advantages & Disadvantages of Franchising for Indian Businesses?
Advantages to the Franchisee: -
He is the proprietor of its own business and owns the tangible assets of the
He gains from the franchisor the entire business concept with full training,
assistance in every aspect of setting up and running the business, and access to
necessary materials and supplies.
Franchisee’s have access to regional and national promotions / advertising
He gets an access to global standards and international technology in products
and services, without loss of control.
Disadvantages to the Franchisee: -
He is not an independent entrepreneur. He has to follow the franchisor’s
The lower risk is offset by the lower reward for the success.
Advantages to the Franchisor: -
Franchising allows him to increase its number of outlets with minimum capital
outlay and so accelerate the network’s growth and probably it’s profitably.
Self-employed franchisees are generally more motivated than salaried managers
and are more likely to give better results for less expenditure of capital on
behalf of the franchisor.
Franchising provides him an opportunity to have access to international market.
Franchising gives him an assured earnings stream to fund continuous R & D
Disadvantages to the Franchisor: -
It has to control and co-ordinate a network of semi-independent entrepreneurs to
ensure favorable image of the franchise.
The franchisor-franchisee relationship is based on trust.
MODES OF FRANCHISING
The following are basically 5 types of international franchising mediums: -
Direct Franchising – Under this system, the
franchisor grants franchises to individual franchisees in the foreign country
through the execution of an international contract. The main problems associated
with this type of franchising is the difficulty of franchisors to control the
performance of the franchisees as these are located in another country, the
assistance to be provided to the franchisee during the operation of the
contract. The question of intellectual and industrial property rights in the
foreign country also needs to be considered. Taxation is another issue which
receives due consideration. Furthermore, how the franchise arrangement is
structured and the existence of treaties between the countries involved may have
considerable influence on taxation. A very important question is clearly that of
the choice of law and jurisdiction. There is a tendency for franchisors to want
their own domestic law to apply to the agreement, even if the franchise is
exploited in another country. Another vital point to be kept in mind is the law
relating to transfer of technology that may be applicable.
Keeping the above problems in mind, it is observed that direct franchising is
not used extensively internationally.
Subsidiary or Branch Office – Franchising through
a subsidiary or a branch office are two methods which are often treated
together, although there are differences which derive from the fact that a
subsidiary, albeit controlled by the franchisor, is a separate legal entity
whereas a branch office is not. Whatever be the difference, an advantage of this
approach is that the franchisor is present in the foreign country as a corporate
body. The contract will in this case be a domestic contract and thus subject to
The problems associated with this type are similar to direct franchising. In
addition, the franchisor will be required to send his personnel to the foreign
country for the start up operations thus involving work permit and residence
Area Development Agreements – Such agreements
traditionally involved an arrangement whereby the developer is given the right
to open a multiple number of outlets to a predetermined schedule and within a
given area. These arrangements in the past have been used mostly in domestic
franchising, but are now being used increasingly in international franchising.
Items that are to be considered here include the number and density of the
outlets to be opened, detailed development schedule and the consequence of
non-complying of the schedule. In such arrangements, the developer will need to
have substantial financial resources so as to be able to open the required
number of outlets.
Master Franchise Agreements – In the international
scenario, this is widely used. In respect to such agreements, the franchisor
grants a person in another country, the sub-franchisor, the exclusive right
within a certain territory to open franchise outlets itself and/or to grant
franchises to sub-franchisees.
In this case, there are two agreements involved: an international agreement
between the franchisor and the sub-franchisor (the master franchise agreement)
and a national franchise agreement between the sub-franchisor and each of the
sub-franchisees (the sub-franchise agreement). The franchisor transmits all its
rights and duties to the sub-franchisor, who will be in charge of the
enforcement of the sub-franchise agreement and of the general development and
working of the network in that country. All the franchisor will be able to do is
to sue the sub-franchisor in case of breach of obligation to enforce the
sub-franchise agreement as laid down in the master franchise agreement.
The advantages of this system are that the sub-franchisor is familiar with the
local habits, tastes, culture and laws of its country and that it will know ways
about the local bureaucracy for necessary permits as and when necessary. The
disadvantages include that the financial returns of the franchisor will be
reduced by the amount due to the sub-franchisor and also that the franchisor
will have to rely on the sub-franchisor for the performance of the franchise
– In the case of joint ventures, the franchisor and a local partner create a
joint venture. This venture then enters into a master franchise agreement with
the franchisor, and proceeds to open franchise outlets and to grant
sub-franchises just as a normal sub-franchisor would do.
An arrangement such as this will have to consider legislation on joint ventures
in addition to all the other legalities that are involved. Problems may also
arise with the fact that the double link may create conflicts of interest for
the franchisor. The advantages accruing from this arrangement may include that
it could be a way to solve the problem of financing franchise operations in
countries where financial means are scarce.
Miscellaneous forms – There is no limit to the
refinement that can be made to the above forms of franchising to accommodate the
differing demands of potential franchisor and / or franchisee. New forms of
franchising, or combinations of different forms of franchising, appear at
regular intervals. Examples of these are stated as follows:
Affiliation or conversion Franchising
Franchise within a Franchise
Subordinated Equity Arrangements
LEGAL ASPECTS INVOLVED IN FRANCHISING
Some Basic Legal Issues?
Franchising has been specifically regulated in only a very few countries. In
part, this is due to the complexity of the relationship and due to the great
number of areas of law that a franchising relationship involves. Some of these
laws are dealt with hereunder: -
Competition Law or Anti-trust Themes
The resources in the market place would best be allocated by free competition;
it is believed that goods and services are provided at the lowest possible price
by the rule of open market forces. Any conduct, which unreasonably restricts
those market forces, must therefore be eliminated. Terms such as ‘prevention,
restriction or distortion of competition’, ‘hinder normal functioning of the
market’, ‘distortion of normal play of competition’ are found in most
competition regimes. When considering the expansion of their businesses through
franchising, entrepreneurs should review their business practices and be mindful
of their conduct in five main areas. These are-
Horizontal restrictive agreements
Territory or customer restrictions
Resale price maintenance
Indian Competition Law – In India laws to prevent
monopolistic, restrictive and unfair trade practices that distort free
competition in the market are found in Part A of MRTP Act, 1969. Also, the
remedies available to the individual consumers for loss and injury suffered as a
result of defective and sub-standard goods and deception are found in the
Consumer Protection Act, 1986 and Part B of MRTP Act, 1969. The first part of
MRTP Act, 1969 is mainly directed against the franchisors, whereas Consumer
Protection Act and Part B of MRTP Act are directed mainly at those Master
Franchisees and franchisees who produce the goods which the Indian Consumer
It is anticipated that consumer protection laws could have a substantial impact
on the development of franchising in India. As discussed earlier, one of the
great strengths of franchising is that although the franchise network is
comprised of independent entrepreneurs each having entered into a franchise
agreement, they all present a common face to the public who should not be able
to distinguish between corporate or franchised outlets. The franchisee uses the
franchisor’s brand name or goodwill, in relation to the goods he sells or
services he offers to the public, thereby representing that the goods or
services are of the same quality or standard as that of the franchisor.
If the consumer finds that it has paid a high price and chosen the
particular brand of goods or a particular agency due to its international
reputation, but does not receive the same quality of goods and services, then it
must have a remedy. Also when the product of the franchise causes injury to the
persons who are the consumer of the products or causes damage to the property of
the consumer, then who should be held responsible?
Consumer Protection Law in India
Consumer Protection Act 1986 is the most relevant to the common man who is the
consumer of the franchised product. This Act covers a wide range of persons who
may be liable including manufacturers, assemblers, distributors, wholesalers,
retailers and packers. It may extend to installers, erectors and repairers of
goods. Therefore, the franchisor or franchisee of goods can fall into this
category quite easily. An action in tort may be also maintained if the
relationship between the consumer and the franchisor / franchisee can be direct
and proximate to create a duty of care towards the consumer.
At present there is no provision for disputes arising specifically out of
franchising in relation to consumer protection, however the general law and
statutes present can provide some relief to the consumer, until such time as
specific legislation in relation to franchising are enacted. A draft model law
framed by UNIDROIT has come into existence.
Intellectual Property Law
The protection of Intellectual Property Rights is of paramount importance to any
international or domestic franchisor that is franchising into a new territory;
since its goods can be copied and marketed by others or its brand name can be
misused resulting in its goodwill being diluted. Further the know-how being
transferred by the franchisor to the franchisee in relation to the product or
services needs protection. In India, the Intellectual Property Laws have been in
existence for long, but its implementation has been developing only in the
recent years with considerable interaction with foreign businesses in relation
to collaborations, technology transfers and trade.
Indian Law on Intellectual Property rights
There are various remedies available in India both under Statute and Common Law
in relation to trademark, design and copyright, which are particularly effective
against infringement and trafficking in trademarks. The Trademarks Act, 1999,
which came into force subsequent to the amendment of Trademarks and Merchandise
Act, 1958, was enacted to provide for the registration and better protection of
trademarks and for the prevention of the use of fraudulent marks on merchandise.
One of the ways for a franchisor to protect a trademark in India is by
registration. The Designs Act 1911 is aimed at protecting the proprietors of
novel or original designs and for enforcing those rights against infringers. It
helps the franchisor to protect his exact design and maintenance of his
goodwill, which is the whole basis of the existence of the franchise system. The
issue of copyright arises in franchise when a franchisor wishes to protect his
franchising manual, which contains the entire technique of running the franchise
business from being used improperly by another. Furthermore, the franchisor may
have videos on how to use the product and for advertisements that need to be
protected from being pirated. Keeping such questions in mind, Copyrights Act,
1957 has been enacted and gives protection to the franchisor against the above
Labour Laws relating to Franchising
Labour laws are very important in International and domestic franchises
especially in relation to the various outlet, shops and offices in which persons
are employed. No franchising contract can derogate from the applicability of the
labour laws. The labour laws govern the day-to-day conditions of employment and
are particularly relevant in the franchising context when an outlet is shut down
or the business is sold, in relation to the amount of compensation payable by
the master franchisee, franchisor or franchisee.
Labour Laws in India
India has numerous labour laws which any foreign or domestic franchisor must be
well aware of before doing business, and to mention a few: -
Apprentices Act, 1961
Contract Labour (Regulation & Abolition) Act, 1970
Employees Provident Funds and Miscellaneous Provisions Act, 1952
Employees State Insurance Act, 1948
Equal Remuneration Act, 1976
Factories Act, 1948
Industrial Disputes Act, 1947
Minimum Wages Act, 1948
Payment of Bonus Act, 1965
Workmen’s Compensation Act, 1923
Payment of Gratuity Act, 1972
Payment of Wages Act, 1936.
Although the general picture of franchising is one of success, there have been
cases of insolvency among the franchisees and franchisors. Insolvency becomes an
issue if either the franchisor or one of the franchisees becomes unable to pay
its debts as and when they fall due. Clearly, the risk of insolvency for both
franchisor and franchisee in India will be greatly increased if the franchise
concept is a foreign one and it has not been properly adopted for the Indian
Insolvency Law in India
The laws that are relevant in India in relation to insolvency are found in the
Companies Act, 1956 and the Provincial Insolvency Act, 1920.
Let us list hereunder some of the documents that are involved while franchising
a business: -
The Manual – It is the embodiment of the know-how
of the franchise. It is therefore of paramount operational importance. It is
very dynamic in nature and continuously undergoes amendments as the business
develops. Let us list here the various contents of a manual:
Staff uniforms / appearances / etiquettes
Staffing requirements of outlets
Contracts of employment
Advertising and Marketing practices
Technical information about equipments.
Uniform Franchising Offer Circular (UFOC) – The
UFOC is based on the American system of disclosure and franchisee protection.
UFOC, like a prospectus, is mandatorily to be given by every person offering to
sell a franchise and should contain information on the following aspects:
Information about the franchisor, his affiliates and their related businesses
Complete professional experience of each of the officers, directors and other
managerial personnel of the franchisor
Clear description, including the nature, extent of involvement, liability etc.
Full details of the up-front fee payable on the franchise and fee payable on the
conclusion of the agreement together with on-going payment schedule.
Assistance provided – technically and financially
Restrictions to be imposed, if any in relation to sale of goods or services.
Details of the training to be provided
Quantitative data on the number of franchises in operation together with
complete list of names and addresses of all franchisees.
Complete and unambiguous disclosure on restriction imposed in relation to
protected territories, if any.
Terms of termination of the contract
Dispute settlement mechanism.
As India enters the era of franchising, first as a nation having large number of
franchisees before it could perhaps graduate into being a nation of franchisors,
the need for clear laws and implementable guidelines to regulate this form of
business is essential.
– A draft agreement between a franchisor and a franchisee is given herein below:
THIS AGREEMENT is made _____ day of _____ between _________ having its
registered office at __________ (hereinafter called “the franchisor”)
of the first part and _________ having its office at ___________ (hereinafter
called “the franchisee”)
of the second part.
The franchisor has spent time, money and effort in developing knowledge of and
expertise (“the know-how”) in _________ (hereinafter called “the services”)
The franchisor wishes to expand the provisions of services and is willing to
grant to the franchisee the rights set out herein.
The franchisee desires the right during the continuance of this agreement to
provide the services from the premises specified in schedule 1 hereto as
directed in the operation manual (“the manual”)
NOW IT IS AGREED AS FOLOWS:
Rights Granted –
The franchisor grants to the franchisee the right to carry on the business in
accordance with this Agreement from the premises, to utilize the Know-How and to
use the Marks.
Subject as herein appears this agreement shall be for a period of _____ years,
commencing from the _________ day of ______.
The franchisor shall:
Assist the franchisee to establish and efficiently operate the business.
Train the franchisee and his staff in the correct operation of the business
Give the franchisee such reasonable continuing assistance and advise as the
franchisor considers necessary.
The franchisor authorizes the franchisee to use the Mark solely for the purpose
of promoting the business
The franchisee undertakes not to do anything to prejudice or damage the goodwill
in the Marks or the reputation of the franchisor
The franchisee agrees in order to protect the franchisor’s intellectual property
rights and maintain the common identity and reputation of the network to comply
with the quality specifications laid down for the equipment.
The franchisee agrees to carry on the business under the Marks and no other
The franchisee undertakes to use his best endeavors and the highest standards in
all matters connected with the business diligently and in a manner to the
reasonable satisfaction of the franchisor.
The franchisee agrees to insure with a major reputable insurance company in an
adequate sum against all normal and reasonably foreseeable risks relating to the
conduct of the business including product liability.
The franchisee undertakes to indicate on all correspondence and notice board
outside the premises the fact that it is an independent franchisee of the
franchisor and is in no other way connected with it.
To indemnify and keep indemnified the franchisor from and against all damage or
liability suffered by it as a result of the franchisee’s acts or omissions.
Financial Obligation -
The franchisee shall pay to the franchisor immediately upon signing this
agreement a franchise fee to the tune of Rs. _______. Further, a monthly sum of
service management fee equivalent to 5% of the previous month’s turnover will be
Promotion and Advertising -
The franchisee shall upon receiving written notice from the franchisor pay on a
monthly basis, a sum equivalent to 2 % of the previous months gross turnover
into the franchisor’s Promotion and Advertising Fund. Such fund shall be used
solely for the national and regional advertising of the services.
Franchisee’s Accounts and Audit-
The franchisee shall maintain proper books of accounts relating to the business
and shall supply the same to the franchisor within 30 days after the end of each
financial year with an audited certificate.
The franchisor or its auditor shall be entitled to inspect and audit the books
of accounts and all supporting documentation of the franchisee relating to the
The Sale of the Business -
The franchisee may not assign or delegate his franchise or any other
right or obligation under this agreement, but may sell his business with the
prior written consent of the franchisor.
The franchisor may terminate
this agreement by a notice in writing to the franchisee if it has committed any
material breach of his obligations specified under this agreement or if any sum
required to be paid under the terms has not been paid at the latest within 21
days following its due date.
Force Majeure -
This agreement shall be suspended during the period and to the extent of such
period that the franchisor reasonably believes any party to this agreement is
prevented or hindered from complying with its obligations under any part of it,
by any cause beyond its reasonable control including but not restricted to
strikes, war, civil disorder and natural disasters.
In the event a dispute or deadlock arises in connection with the validity,
interpretation, implementation or breach of this Agreement the Parties shall
attempt, in the first instance to resolve such dispute through negotiations
within thirty (30) days or within such longer period as may be agreed to between
the Parties in writing. In the event that the dispute is not resolved through
negotiations, or such negotiations do not begin within the reasonable time
period set out in the notice calling for the same, either Party may refer the
dispute to Arbitration, with each Party nominating one Arbitrator, and the two
Arbitrators so appointed shall nominate a third Arbitrator to constitute a three
(3) member arbitral tribunal. The Arbitration proceedings shall be conducted in
accordance with the Rules on Arbitration framed by the International Chambers of
12. Miscellaneous -
•Language: This contract, and all data and documentation, reports and other
written materials, and all communications between the parties pursuant to
performances of this contract, shall be in the English Language.
•Amendments: No modification, amendment or waiver of the terms and conditions of
this Agreement, shall be valid or binding, unless made in writing and duly
executed by both the Parties.
•Headings: The headings used in this Agreement are for convenience only and are
not to be used in construction or interpretation.
Signed for and on behalf of
Procedure for Approval of Foreign Franchises in India?
The approval procedure is complex and bureaucratic. The application has to be
made to Secretariat for Industrial Assistance, Department of Industrial
Development in form FC (SIA) along with 10 extra copies. No fees need to be paid
with the application for technical collaborations.
On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration
number. The application is then sent to the Foreign Collaboration section 1 in
SIA, which sends the document to various departments such as the technical
advisory section, department of economic affairs and the concerned
administrative ministry for scrutinizing. Their comments along with the papers
are then put before the Project Approval Board (PAB). The Board takes into
account the need for foreign know-how, technology transfer and the terms of the
Those proposals involving only financial collaboration or a combination of
financial and technological collaboration are sent to the Foreign Investment
Promotion Board (FIPB). If the investment in the project is up to 600 crore
rupees, the application is sent for final decision to the Empowered Committee
headed by the Finance Minister. In respect to projects requiring more than 600
crore rupees, the application is sent to the cabinet committee for final
approval. The Section 2 of SIA issues the final approval within a period of
approximately 45 days from the submission of the application form.
The approval by the government may vary the terms of franchise including the
mode of payment of royalty / lump sum payment to the franchisor. If the terms
are not favorable to the franchising business, representation against the same
can be made to the administrative ministry concerned. A copy of the
representation made by the applicant should also be sent for information to the
Foreign Collaboration Section 2 of SIA.
We thus see the bureaucratic bottlenecks involved in obtaining the permission to
set up foreign franchises in India. This deters investment.
Draft Model Law on Franchising made by UNIDROIT?
The following is the text of the draft model franchising disclosure law as
revised by the study group at its fourth session, 9-19 December 1999.
This law applies to franchises granted for the operation of one or more
franchised businesses (within the national territory of the state adopting this
This article covers definitions relating to affiliate of the franchisor,
development agreement, disclosure document, franchise, master franchise, and
No disclosure is required:
In case of the grant of a franchise to a person who has been an officer or
director of the franchisor for at least 6months immediately before signing the
In case of the assignment or other transfer of a franchisee’s rights and
obligations under an existing franchise agreement, where the assignee or
transferee is bound by the same terms as the assignor or transferor.
In case of the renewal or extension of a franchise on the same conditions.
If the transaction is pursuant to an offer directed by the franchisor to only
one person or entity for the entire jurisdiction.
Disclosure must be in writing. The format of the disclosure document is as per
the discretion of the franchisor, provided it contains all information imposed
by this law.
A franchisor must give every prospective franchisee a disclosure document, to
which the proposed franchise agreement must be attached at least 14 days prior
to either the signing of the agreement by the prospective franchisee or the
payment by the prospective franchisee of any fees relating to the franchise.
The franchisor shall provide the following information in the disclosure
The legal name and address of the franchisor
The address of the principal place of business of the franchisor
The description of the business experience of the franchisor
Complete professional experience of each of the officers, directors and other
managerial personnel of the franchisor
Relevant details of any criminal or civil liability for the previous 5 years
The total number of franchisees in the network
Information regarding the franchisor’s intellectual property rights.
The following information shall also be included in the disclosure document.
However, where it is contained in the agreement, the franchisor may make a
reference of it.
A description of the franchise to be operated by the franchisee
Terms and conditions of renewal of the franchise
A description of the training facility
Conditions for termination.
Where the franchise is a master franchise, the sub franchisor must in addition
to above items, disclose to the prospective sub-franchisee the information that
it has received under the above points as well as the situation of the
sub-franchise agreements in case of the termination of the master franchise
The franchisor may require the prospective franchisee to sign a statement
acknowledging the confidentiality of the information relating to the franchise.
As a condition for it’s signing the franchise agreement, the franchisor may
require the prospective franchisee to acknowledge in writing the receipt of the
The disclosure document must be written in a clear and comprehensible manner in
the official language of the principal place of business of the prospective
franchisee or in the mother-tongue of the franchisee.
If the disclosure document is not delivered at all or is not delivered within
the period of time established in article 5, the franchisee is entitled to
terminate the franchise agreement
If the disclosure document contains a misrepresentation or if there is an
omission of a material fact required to be disclosed under article 6, the
franchisee is entitled to terminate the franchise agreement.
The above is a model law yet to be passed. Countries, like India, which do not
have any specific legislation, could take the above as its basis of franchising
law governing their territory.
Financial And Taxation Aspect of Franchising
Valuation – what is the franchise worth?
A franchise is like any other asset. Ultimately, its value is what people are
willing to pay for it. However, when considering the commercial viability of
licensing as compared to some other form of exploitation, it is important to try
and scientifically arrive at a reasonable valuation. It is only when the
franchisor and the franchisee have taken a view as to the value of the franchise
that negotiation can take place and ultimately a franchise granted. When
entering into a master franchise / development agreement, the franchisor
undertakes a number of commitments, which cost money and thus forms the basis of
valuation. These include:
Technical and / or marketing support.
Making improvements available
Use of trademarks
Service fees, royalties and other sums paid in return for the franchise
represent a return on the valuable asset. Now the question arises as to ‘How do
we calculate the return?’ Some of the possible ways to calculate the amount is
Net Cash Flow – It takes into account costs of
doing business as well as additional capital investment needed to sustain the
cash flow. The net cash flow represents the economic benefits derived from the
ownership of the franchise. These are determined by management actions together
with factors like:
Economic Climate – the value of a franchise is directly associated with the
general trends in the economic situation.
Profitability – this aggregates the cost element, such as wages, procurement of
raw materials, conversion of raw materials, sales and overheads.
Competition – The strategies of competitors can limit the amount and duration of
future cash flows and must therefore be taken into account.
Capital Requirement – This can reduce the amount of future net cash flows that
are derived from the franchise.
Actual and potential value – A franchise need not
have immediate economic benefits for it to be valuable. Indeed, established
brands may often need further developments before they have actual value in a
foreign territory. This approach takes into account the following factors:
Discount Rate – Inflation can diminish a purchasing power of future
economic benefits. Liquidity represents the difficulty with which an
investment can quickly be converted into cash.
Real Interest – This represents the component of return from investment with
sacrificing alternative use of the invested funds.
Risk Premium – This is the ended amount of return that investors demand for the
assumption of risk.
Discounted Cash Flow Method – This method
determines the present value of projected cash flows associated with the
franchise. The present value is the value in today’s money of the expected cash
flows generated by the asset being valued. Cash flows are adjusted for the time
value of money and the risk of their eventual realization.
Cost Method – This approach focuses upon the cost
of creating an economically equivalent substitute, i.e. replacement value. It is
interesting to note that in determining the value of a franchise, the cost of
the original development is rarely discussed. The reason for this seems to be
that they do not fit into the equation suggested. They are seen as necessary but
irrelevant as regards calculating the value. Millions of rupees might be spent
upon R & D, but if the final franchise does not work, it will have no value.
Comparable Value Method – Market value can be
transaction based or security price based. In order to make progress with this
approach, it is important to identify a business, which is truly comparable in
an economic sense, and secondly once such a comparable business has been
identified, obtaining the relevant information – much of which will be
confidential and therefore inaccessible- will be the task at hand.
Taxation is another issue which receives due consideration. It is important to
know the local sales tax, property tax, and withholding tax applicable in a
certain area. Furthermore, how the franchise arrangement is structured and the
existence of treaties between the countries involved may have considerable
influence on taxation.
The situations and types of taxes that apply to franchising in India are
described below: -
Where the franchisor receives royalties service or franchise fees, tax has to be
paid under the Income Tax act, 1961 as income ‘arising’ and ‘accruing in India’,
whether the franchisor is an Indian or foreign party.
If the franchise is wholly based in India, then the franchisor and franchisee as
separate companies or partnerships will be subject to the taxes applicable to
all Indian Companies incorporated under the Companies Act, 1956.
In a case where the franchisor is a foreign party and the franchisee is Indian,
and the franchisor sends technicians and supervisors to India, the salaries
payable to these persons would be subject to personal income tax, whether an
arrangement is made to deduct the tax at source or they are taxed as self
employed persons if they come as consultants.
If the franchise agreement provides that the franchisee shall export or sell to
the franchisor some of the goods produced by it, then taxes will be levied on
the deemed profits.
If the master franchisor is a foreign company, it will be taxed only on income
that arises from operations carried out in India or in certain cases, on income
that is deemed to have arisen in India. The latter includes royalties, fees for
technical support, interest, gains from sale of capital assets situated in India
and dividends from Indian companies.
Advance tax has to be paid by both, Indian and foreign corporate assesses, whose
taxable income exceeds Rs. 5000/- p.a.
In calculating the amount of tax payable by the franchisor / franchisee company
as assessee, the deductions available in Section 30 to 43D of the Income Tax
Act, 1961 can be important for tax planning purposes. Some of these relate to:
Rent, rates, taxes, repairs and insurance in respect to premises used for
Expenditure on scientific research
Expenditure of a capital nature on acquisition of patent rights or copyrights
The availability of tax advantages would depend on the type of franchise, the
product of the franchise and where the unit is to be physically located.
Collection of Tax – the income received by the foreign franchisor are taxable,
and these have to be paid in India through an agent which could be the
Capital Gains Tax is relevant to a franchise business as any profits and gains
arising from the transfer of a capital asset effected in the previous year is
chargeable to income tax under the head “capital gains”.
Advance ruling on Taxation – if a foreign Master Franchisor has any
apprehensions or uncertainties regarding the tax implications of any venture or
transaction in India, a reference or application can be made to the Advance
Ruling Authority under Section 245N of the Income Tax Act, 1961.
It must be noted that the above is subject to Double Taxation Avoidance
Agreements entered into by India with any foreign country. The tax liability
would accordingly be reduced. Section 90 of the income tax act gives recognition
to this and this agreement takes precedence over the terms of the income tax
Termination of Franchises
Termination of an international franchise system is without doubt one of the
most difficult issues for a franchisor to face. Not only must the franchisor
face often complex legal provisions, sometimes providing for substantial
compensation, it must face the daunting task of deciding exactly what should
happen to the franchise in the territory following the termination.
The prospect of terminating a franchise agreement with a Master Franchisee,
developer or franchisee raises a question of what is to happen to the franchise
in the territory following the termination. The answer will inevitably depend on
the value and potential value of the market. If the territory has a number of
profitable outlets ‘up and running’, it will usually allow them to continue. One
way of achieving this is to terminate the Master Franchisee’s right to open new
If full termination is the only possibility, the choices for the franchisor are:
Pulling out of the territory
Stepping into the master franchisee’s shoes
Appointing a new master franchisee for the whole territory.
The whole question of jurisdiction and conflict of laws is absolutely vital for
the draftsman to consider when contemplating what may occur in the case of
termination. Termination is generally resulted from breach of the franchising
agreement. In such cases, the grounds are quite reasonable and, provided the
obligation of notice being served is duly complied with, termination is set in
Some of the legal issues that are to be kept in mind are:
Intellectual Property rights – It is important that following termination, the
franchisor takes steps to protect its trademarks and other intellectual property
rights from the abuse by the master franchisee / developer / franchisee.
Arrears – non-payment of declared sums is a somewhat easier matter to deal with
as the franchisor can weigh up the pros and cons of entering into litigation.
Real Estate - At least part of any real estate owned by the Master Franchisee /
developer / franchisee used in the business may also have to be transferred.
Valuation will create great difficulty.
Goodwill – A further issue which can arise is the Master Franchisee / developer
/ franchisee desiring to retain at least some of the goodwill established in the
franchise and carry on the business in the territory under a different name.
Termination is to be avoided if at all possible. However, if the situation is
one to which there is no
other acceptable response, it must be effected quickly and efficiently. Careful
planning of the legal procedures and subsequent commercial action is essential.
Franchising in other countries
Different countries have taken different approaches in regulating franchising
within their territory. Those areas of franchising relationship that are usually
regulated are recruitment, the relationship and termination rights. Regulation
takes the form of mandatory forms of disclosure, registration of the franchise
document and statutorily prescribed contractual provisions as regards, for
Now, let us see how franchising has been regulated in other jurisdictions:
Franchise legislation in United States is of 2 types:
The relationship between the parties after the franchise has been initiated
The offer and sale of the franchise – Disclosure Legislation. This again is of
two forms. At federal level, in the form of the 1979 Federal Trade Commission
(FTC) Rule on Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures. Then at the state level in the form of state
Under the legislation, the franchisor has to go through a process of
registration and examination by state administrators. The FTC Rule requires
franchisors to provide prospective franchisees with a document with detailed
The franchisor, his directors and officers
Litigation and bankruptcy histories
The franchise to be purchased
Initial and recurring payments
Obligations and duties
Termination, cancellation and renewal provisions
The Franchising Code of Practice (“Code”) came into operation on 1.2.1993 and
was administered by the Franchising Code Administration Council Limited (FCAC).
The Code is intended to provide a best practice guide to regulate the
relationship between franchisors and franchisees. Registration under the code
was voluntary, but once registered, franchisors were required to comply with its
terms. The introduction of the code was intended to provide, amongst other
things, minimum prior disclosure standards, to facilitate improved dispute
resolution between franchisors and franchisees and to improve franchise business
The code regulates not only the direct parties involved, but also those
providing ancillary services, such as financial institutions, advisers and
The European Code of Ethics for Franchising adopted by the European Franchise
Federation (EFF) provides that “in order to allow prospective individual
Franchisees to enter into any binding document with full knowledge, they shall
be given a copy of the present Code of Ethics as well as full and accurate
written disclosure of all information material to the franchise relationship,
within a reasonable time prior to the execution of these binding documents. The
code further provides for a general obligation that “advertising for the
recruitment of individual franchisees shall be free of ambiguity and misleading
The European Code is applicable to the members of the national associations
which are members of the EFF, i.e. Austria, Belgium, Denmark, France, Germany,
Hungary, Italy, Netherlands, Portugal and the United Kingdom.
Franchising – Precedents
Let us evaluate some of the franchise outlets that have been successful in
running their businesses.
We Have Always Been A Franchising Company
McDonald’s has always been a franchising Company and has relied on its
franchisees to play a major role in its success. McDonald’s remains
committed to franchising as a predominant way of doing business.
Approximately 70% of McDonald’s worldwide restaurant businesses are
owned and operated by independent businessmen and women, our
A Recognized Premier Franchising Company
McDonald’s continues to be recognized as a premier franchising company
around the world. Perhaps the fact that McDonald’s management listens so
carefully to its franchisees has something to do with McDonald’s being
perennially named as Entrepreneur Magazine’s number one franchise.
A Partnering Relationship
Our franchising system is built on the premise that the Corporation can
be successful only if our franchisees are successful first. We believe
in a partnering relationship with our owner/ operators, suppliers and
employees. Success for McDonald’s Corporation flows from the success of
its business partners.
What We Are Looking For
Our selection of prospective candidates is based on an assessment of
overall business experience and personal qualifications. We look for
individuals with good “common business sense”, a demonstrated ability to
effectively lead and develop people, and a history of previous success
in business and life endeavors. A restaurant background is not
necessary. We franchise only to individuals, not to corporations,
partnerships, or passive investors.
Is Seeking Qualified Individuals To Become Franchisees
We are particular about our Franchisees because they make McDonald’s successful
by focusing on customer satisfaction. That’s why...
We are looking for individuals who have:
Business experience in the market where they are seeking a franchise
A strong desire to succeed, work hard, and contribute to a winning team
Demonstrated personal integrity with emphasis on interpersonal skills
A willingness to participate in a comprehensive training program
A willingness to personally devote full-time efforts to the day to day
operations of a McDonald’s restaurant business
A history of success and the ability to work well within a franchising
Personal, non-borrowed resources to be invested in a McDonald’s restaurant
A chance to run your own business without being alone. You will be supported
by the world famous McDonald’s System.
Support in the areas of operations, training, advertising, marketing, real
estate, construction, purchasing and equipment.
Personal satisfaction both as an owner/operator and as a member of
McDonald’s worldwide organization.
Personal growth and business knowledge from McDonald’s extensive training.
Franchising Frequently Asked Questions
Q: What business qualifications does McDonald’s seek in its potential
A: The following qualifications, among others, are essential to be considered
for a McDonald’s franchise:
High personal integrity
An entrepreneurial spirit and strong desire to succeed
A proven ability to motivate and train people
The ability to manage finances
A willingness to personally devote full time and best efforts to the
day-to-day operation of the restaurant as an on-premise owner-operator
A willingness to complete a comprehensive training program and become
proficient in all aspects of operating a McDonald’s restaurant business
Q: How much does a McDonald’s franchise cost?
A: Typically, new restaurant costs range from 432,800 to 715,150.USD. The size
of the restaurant facility, area of the country, pre-opening expenses,
inventory, kitchen equipment, signage, and style of decor and landscaping will
affect new restaurant costs. These costs are paid to suppliers. In addition, at
the time of opening, an initial fee of 45,000 USD is paid to McDonald’s
Corporation for all new restaurants
Q: How much cash (or liquid assets) is required to acquire a franchise?
A: The initial cash investment is a minimum of $175,000 for a conventional
purchase or $100,000 for a Business Facilities Lease.
Q: Will McDonald’s finance the remaining balance of the cost of the franchise?
A: No. McDonald’s does not provide any financing. The remaining cost may be
financed through a bank
Q: May I obtain the funds to purchase a franchise from a relative, friend or
A: No, because this would then involve you in a type of partnership. We do not
franchise restaurants to partners or investors. An individual must personally
meet the financial qualifications and be willing to devote his or her full time
and best efforts to the day-to-day operation of the restaurant. A franchisee
must divest himself or herself of all other active business interests.
Q: Is there any way I can be considered if I do not have all the required
A: In a limited number of cases, McDonald’s grants a Business Facilities Lease
(BFL) franchise to candidates who excel in all qualifications but are unable to
meet the financial requirements of the conventional franchising program. An
individual must have a minimum of 100,000USD of non-borrowed personal resources
to be considered for a franchise under the BFL program.
Q: What is the availability of opportunities in my country?
A: The availability of franchises in specific geographic areas must be discussed
with McDonald’s franchising personnel in the specific country for which you have
interest. However, as you can appreciate, McDonald’s cannot predict which
locations will be available when your training is complete. Therefore geographic
flexibility is a characteristic we seek in candidates.
Q: Will McDonald’s buy a piece of property that I own and then sell me the
franchise for that location?
A: Our franchisee selection process does not play a part in our site selection.
In other words, we develop a location because we think it will be successful and
without regard to whom the franchisee may be. McDonald’s does all of the site
evaluation and selects the location. We acquire the property, improve the site
and construct the building. The franchisee is responsible for equipping the
facility with all necessary items of kitchen equipment, seating and decor, signs
and landscaping, etc. As sites are developed, we offer them to candidates who
have already completed training and are approved to become owner-operators. .
Notable Franchising Facts
First Franchised McDonald’s Restaurant
Des Plaines, IL
First McDonald’s Franchisee
First International McDonald’s
British Columbia, Canada
First Twin Grand Opening
Two Restaurants in Cairo, Egypt
McDonald’s International Division Created
Seven of the world’s busiest McDonald’s are located in Hong Kong
McDonald’s franchisees developed 3 of our famous sandwiches.
First Restaurant in DesPlaines, IL
Salient Features of ‘Wimpy’s Franchise’ in India
One time non-refundable upfront franchise fee for a 10-year contract.
All investments for establishing the restaurant to be provided by the
franchisee, Investments would depend upon the size of the restaurant,
seating capacity, etc. etc.
Licenses, Power load, etc. to be arranged by franchisee / investor.
The restaurant shall be run, managed and controlled by the franchisee. All
costs for day to day running of the outlet shall be incurred by the
franchisee. The raw material shall be supplied by the franchiser, Wimpy
International Limited at ex-factory cost.
The franchisee shall pay a sum equivalent to 7% of the net sales as
No working capital deployment by the franchisee. Restaurant shall be run,
managed and controlled by WIMPY Management at their cost. All costs for
day to day running of the outlet shall be incurred by WIMPY.
An attractive return is assured to the franchisee / in terms of fixed
percentage of net sales starting from 1st day of operations.
Wimpy International Ltd. shall provide advice and consultation concerning
the site feasibility assessments through its officials/professional
specialists. All expenses and charges for whom will be paid for by the
Strategic outlook for the soft drinks industry in 2010
Publication date : Feb 1, 2001
Author : Canadean Ltd
The ‘revolution’ is already under way
Over the next decade the global soft drinks industry is likely to undergo
probably the most fundamental change in its entire history, according to a new
report from Canadean, the international beverage research specialists. With its
traditional focus mainly on carbonates, and notably colas, often involving
complicated franchise systems, the soft drinks business is already in the throes
of a major revolution which encompasses the very concept of a ‘soft drink’ as
well as questioning the relevance of the franchise system that has served the
industry so well for so long.
At the same time the competitive landscape is shifting dramatically, says the
Canadean report. Once mainly the preserve of Coca-Cola and Pepsi-Cola, the
carbonates market alone is seeing successful local players emerge to challenge
the pre-eminence of the US multinationals, from Europe to South America. In the
context of the wider definition of soft drinks, the competitive line-up now
includes international majors such as Nestle, Danone, Unilever and Procter &
Who will set strategy now?
Against this background the Canadean report spells out the sort of conflicts
that could arise within the existing franchise system for soft drinks,
consisting as it does of brand owners and brand bottlers, especially the more
recently consolidated ‘anchor bottlers’ - now very large businesses in their own
right. The whole ethos of the anchor bottler is based on achieving ever more
efficient production built around fewer and fewer high speed filling lines. That
implies constant product and brand rationalisation. On the other hand, a
strategy which embraces the new wider definition of soft drinks implies product
proliferation. So who will set the strategy agenda in the future? How are these
two seemingly opposing strategies to be reconciled?
Pressures for lower concentrate prices
Moreover, the growing importance of anchor bottlers within the franchise system
raises even more fundamental questions for the brand owners. In recent years
both Coke and Pepsi have learned to their cost the need to stay close to local
consumers, and are now reversing earlier strategies aimed at centralising their
global operations, especially marketing. As they decentralise that role, and the
‘added value’ function of global marketing becomes increasingly superfluous,
there will be growing pressure from anchor bottlers for the brand owners to pass
on corporate savings in lower concentrate prices. That pressure is likely to
become even more intense wherever it becomes apparent that brand owners’ field
operations are duplicating those functions already performed by anchor bottlers’
local subsidiaries. The franchise system can no longer afford a multiplicity of
brand managers ‘responsible’ for a single brand, for example.
Franchise/Bottler Profit Split
Is There Enough To Share?
Significantly reduced market growth (3-4% in the 1990s against 6%-8% in the
1980s), coupled with low inflation, hugely increased retailer customer buying
power, as well as markedly lower entry costs for local soft drinks manufacturers
have brought about an intensification of price competition. This has thrown into
sharp relief the franchise system’s dependence on sharing the total profit
available - at a time when overall profitability is being eroded. So, sharing
this smaller pie is bound to create even more pressures within the franchise
The relative performance of share prices - brand owners vs bottlers - has also
underlined the significant differences that exist between the low capital
intensity of the brand owners’ balance sheets (reflected in a high return on
capital employed) and the high capital intensity of the anchor bottlers which
typically achieve half the rate of return of brand owners. Furthermore, the fact
that Coke and Pepsi are still very substantial owners of anchor bottlers’ shares
may also mean they could be faced with a delicate fiduciary balancing act when
it comes to decisions which directly affect bottler profitability.
Changing competitive landscape
Finally, the report explains how local companies have emerged to compete
successfully with the US multinationals. Key factors working in favor of local
players include the sharply reduced costs of market entry ranging from packaging
to media; the widespread availability of technical know-how provided by flavor
houses, filling equipment makers, packaging suppliers; the role of leading food
chains in demanding higher quality and lower prices in return for extended
supply contracts - an imperative which does much to explain the continuing focus
on pruning overheads within such companies. Moreover, there is growing evidence
that soft drinks manufacturers, which operate within a single integrated system,
may be attaining a level of profitability, which is greater than half the total
profit pot, which has traditionally been available to the whole of the two-tier
Source : www.just-drinks.com
Archies Gifts & Greetings
was set up in 1979 as a partnership firm to carry out the business of
manufacturing and marketing of posters and greeting cards. The company pioneered
the concept of branded retailing in India. The first exclusive store of the
company was opened in 1987. In 1990, the business of the partnership firm was
taken over by Archies Greetings & Gifts Pvt Ltd and the company was incorporated
as a public limited company in 1995. Today Archies Gifts & Greetings is the
market leader in the Gifts & Greetings business.
Moolchandani, Managing Director, Archies Gifts & Greetings, hails
from a business family originally engaged in the business of sarees.
Discontented with his family business, Moolchandani commenced the business
of selling posters and greeting cards through mail order. His sharp
acumen, keen sense of observation and ability to predict future trends has
helped him grow the business from a small beginning to the current size of
In an interview with Toral Modi and Satish Koneru of Indiainfoline,
Mr.Anil Moolchandani articulates his vision for the company.
How did you start the business of Gifts and Greetings?
This business was started as a hobby. We were all doing our family business of
sarees. From there we started the business of songbooks -- the lyric books of
English songs. So we sold all this stuff through mail orders at that time. Then
we started making posters which were also distributed through mail order.
Subsequently, we started getting queries from retailers that they wanted to
resell them so the wholesale network was started. We then got feedback about the
demand for cards, so we went on to greeting cards also. After that, we started
opening exclusive stores because cards had limited appeal at the time. The
business was started in 1979 and the first store set up in 1987. We then made
our own model suitable for Indian conditions. We created a branded franchise.
Now the scenario has changed in India and everybody talks about franchising.
But we were the first to do that kind of stuff. We then went in for tie-ups so
as to get a greater range to support these stores because these were exclusive
stores. Earlier the cards were sold in shoeboxes in bookstores or stationary
stores. So we have provided a comfort level and an ambience to the customer who
shops for greeting cards. Generally a customer goes to a store to buy, say, `X’
card, and he starts picking up many other things.
You have several JVs for sourcing designs.
We have an exclusive arrangement with the world’s largest publicly owned company
- American Greetings. We reproduce their designs in India keeping in mind the
Indian environment. Then we have couple of other tie-ups -- just to increase the
range. We pay 5% royalty on the designs we choose from our principals. In
certain JVs, we buy at one fixed price and then reproduce it.
When was the Gifts business started?
Once we started franchising we realized that 50% of sales come from these gift
items. Earlier, these franchisee outlets used to source these gift items
themselves, because we were not producing them. Four years back, we launched a
gift division to source and make exclusive gifts. We see the gift line as having
great potential for the future.
Is there a conscious focus to increase sales from gifts and stationery products
because of the danger of low growth in cards?
Gift is one thing that you have to update everyday. And once you are sourcing
and creating gifts exclusively with different raw materials, it is not that easy
to enhance its revenues from the day one, like in greeting cards. So, setting up
a gifts business takes time. We definitely see it as a fast moving thing and in
terms of value also it is much higher than greeting cards.
Do you perceive a threat from the e-greetings business?
The penetration of computers is very low. Five years down the line we definitely
see it growing and we have to be there in that media also. E-greetings will be a
support for our industry. But it will not replace the physical choosing and
sending of cards. E-greetings have a different feel altogether. Also, if someone
receives 100 e-cards, he will not be able to open each greeting and enjoy it.
E-greetings can only be a `last minute’ activity on people’s minds. The physical
sending of cards will remain. Even if you look at the European and American
greeting card market, you will realize that e-greetings are not a major threat
to the paper greetings market. The year 1995 was a full Internet year for the US
market and greeting card sales were $6.5bn, which grew to $7.2bn in 1997. With
these figures, one can easily estimate the growth of paper cards versus
What are your plans for the online business?
We have launched our dot-com company. It is not going to be yet another website,
but an interactive e-gifting vertical portal, with the primary focus on third
party gifting. This will serve as a complete one-stop shop for the browser, to
fulfill and satisfy his emotional needs of “meet, greet and gift”. The site will
have three main functional areas -- meet, greet and gift, which will have
.various e-centric services and intelligent storefront along with a shopping
engine. Our e-shopping model will be different from the current set-up of
various e-enabled dot-com companies. We will focus on single point sourcing and
single point fulfillment in the first phase and multi-point sourcing and
multi-point fulfillment in the second phase. Our forte lies in the fact that we
are not dependent for warehousing and sourcing on other vendors.
How will the physical distribution be enabled?
As you are aware, we have a strong network of over 400 franchise stores and
apart from this we have six branch offices and 55 distributors located at 120
locations across the country. Initial fulfillment will be taken care of from
Delhi and this will subsequently, in a phased manner, be extended to our
branches, distributors and franchise outlets. This whole network will come in
place anywhere between one and three years based on the market response to our
vertical gifting portal.
Do you see your product mix changing in future?
The market is changing drastically every year and we have to move with the
times. We have been doing that and wherever we see the thrust we will move in
that direction, of course, keeping our consumer base the same. We will not move
to any other trade because we already have a marketing set-up. Any other product
that we sell will be within that customer profile.
How many Vision 2000 stores are being planned? What is the investment in real
estate for these Vision 2000 stores?
At the moment we have 17 stores. They are mainly located in Delhi, Bombay,
Bangalore and Nagpur. We have a plan to set up six such stores every year. They
are huge in size; they display and justify all our products -- whatever we have
created. We are taking all these stores on lease or on rent. Also, we are
converting existing franchisees into Vision 2000 stores. About 50% of these are
going to be company owned. Under the franchise arrangement, Vision 2000 stores
get some kind of support from us because they stock everything that produced by
us. Support will be in terms of changing the dead products, replacement
facilities, new schemes, new merchandise, new packaging. Everything about the
Vision 200 stores is unique. Even the neon signs are different than the existing
How would you see your business growing in terms of top line growth?
We are expecting around 15–20% growth. We have three main categories -- greeting
cards, stationery and gifts. We are trying to put more efforts in the gifting
area. The gift business is growing by 30% and the card business is growing by
15%. Music and perfumes are included in gifting. Stationery is growing at around
What kind of advantage do you hope to gain from the conversion of distributors
to C&F agents?
One advantage is that C&Fs display and stock everything that we produce, while
distributors pick and choose. So the retailers will get a range to choose from.
Also, the percentage of sales C&Fs are paid is less. So the company gets a
Are all distributors being converted to C&F agents?
Not all. We are going step by step. Today, we have converted four states to this
system. We are learning from experience and gradually all will be converted to
C&Fs. Seeing the volumes, everybody wants to become a C&F, but it is not an easy
task. We have to be practical and we have to be geared up by creating that kind
of inventory for C&F. So it has to be done step by step. The entire conversion
will be completed two years down the line.
What is your vision for the company?
We would like to be what we are -- the leader for years to come. We will be
responsible for creating new `days’ so that people will find a reason to greet
each other and keep in touch. It is very essential that everything we create
becomes an example for others to follow. We created Valentines 14 years ago.
Nobody knew what it was then. With the satellite boom, everybody has
participated in that occasion and have made it a big event. This year,
Valentine’s day contributed 7% to total sales. It was only 1% of sales four
years ago. Similarly we created a Friendship Day four years ago and in the years
to come it will become very big.
Where do you see the company five years from now?
Five years from now I think we will have 100 Vision 2000 stores, which will
contribute at least 40% to sales. C&Fs will contribute 40% to sales and the
balance 20% will come from distributors. And, if the dot-com takes off, then you
What has been the key factor behind Archies’s success?
There is no one particular reason. There are many. The first is that you have to
create a product which is innovative, which is price sensitive and of a good
quality and then this has to be supported by retail branding. That’s the
success. You create an excellent product but you don’t have a retail, it will
not be noticed.
20 January 2002, All Rights Reserved.