Buying a Franchise in India: How to Assess Refurbishment Costs

When buying a franchise, an estimate of the initial fit-out costs is not enough. The brand may later introduce a new look, equipment or sales system that you will have to pay for. Here, refurbishment means changes to the premises and equipment, not renewal of the franchise agreement. Shared standards are useful across a franchise network, but committing without understanding their cost is risky. Assess these future expenses separately before you buy.

1. Where is the right to require changes set out?

Do not just search the draft agreement for the word ‘refurbishment’. Provisions covering ‘brand standards’, ‘store appearance’, ‘equipment upgrades’ and ‘amendments to the operations manual’ can also generate additional costs. Pay particular attention to any clause allowing the franchisor to change standards from time to time and requiring the franchisee to comply at their own expense.

Divide the costs into three categories: routine repairs, replacement of ageing equipment and brand-led redesigns. This will help establish whether you could be expected to refit the entire shop under the heading of ordinary maintenance. Keep changes needed for safety or legal compliance separate from purely cosmetic updates.

Before signing, ask for:

• The current design specifications, equipment list and relevant operating standards.
• Details of changes already approved or proposed.
• The scope of recent work at comparable outlets and actual invoices, where available.
• Written confirmation of how long a new outlet will be exempt from the next mandatory update.

If documents are unavailable, do not treat an estimate as a verified cost. Keep uncertain items open on your due diligence checklist.

2. The legal position in India and your protection

India has no separate, comprehensive central franchising law, mandatory pre-sale disclosure document or franchise-specific registration regime. This does not mean that ordinary business registrations and permits are unnecessary. Nor is there a prescribed government format for disclosing future refurbishment costs; buyers should request the information and have it incorporated into the agreement.

The Indian Contract Act, 1872 provides the main framework for contractual validity, free consent and the consequences of breach. Where fraud or misrepresentation affects consent, questions may arise about whether the contract is voidable and what other remedies are available, depending on the circumstances. However, not every incomplete estimate automatically amounts to fraud, and compensation is not guaranteed in every case.

The Competition Act, 2002 may also apply, but a mandatory update is not anti-competitive simply because it is expensive. Building, fire safety, electrical safety and local permitting rules may also apply, depending on the nature and location of the work.

Do not assume that cost caps, advance notice or a procedure for raising objections are special statutory rights you receive automatically. Make them explicit contractual protections. Have sales assurances such as ‘you will not need to change anything for several years’ confirmed in writing by an authorised signatory and incorporated into the agreement.

3. Calculate cash needs beyond the invoice

Do not set your budget solely on the basis of a contractor’s estimate. Implementing a new look may also involve design, freight, installation, removal of old fittings, permits and storage during the work. Technology changes can bring subscription or system integration charges as well as equipment costs.

If the shop closes fully or partly during the work, rent, wages and loan repayments may continue. Calculate the effect of interrupted sales separately; it would be wrong to treat all lost sales as lost profit. Ask a chartered accountant to distinguish between gross contribution, costs you will avoid and payments that will continue.

Build your cash estimate as follows: payments for the changes + ongoing expenses during closure + preparations for reopening + a contingency allowance. Check the timing of tax payments and any available tax credits too; do not treat a tax credit as an immediate cash saving.

Prepare a base case and a stress scenario. In the latter, allow for delayed completion and a slower recovery in sales. If you will need to borrow, do not assume finance will be available. Ask the bank which expenses qualify for funding, what conditions apply to disbursement and when repayments will begin.

4. What terms should you agree before signing?

A good clause does more than refer to ‘reasonable costs’: it sets out the decision-making process. Work with your lawyer to clarify the following:

• Notice and timing: How much written notice will you receive, and how will the deadline for completing the work be set?
• Frequency and limits: How often can major changes be required, and whose consent is needed for spending above an agreed limit?
• Basis of costing: Who will provide a detailed scope of work and an itemised estimate? How will additional work be approved?
• Alignment with the contract term: If little time remains on the agreement, how will the parties consider deferring or sharing a major investment, or making another arrangement?
• Delays and closure: If permits or brand approvals are delayed, what extensions of time and other relief will apply?

Ask operators of outlets of a similar size and with a similar older fit-out about their experience. Their invoices and closure periods offer useful pointers, but they do not guarantee your costs. Finally, incorporate everything agreed into signed documentation.

Practical takeaway: Buy a franchise only once you understand the next likely update, who will pay for it and the process for requiring and implementing it. Alongside your initial investment, plan for future mandatory investment too.