Buying a Franchise in India: Check Mandatory Purchasing Terms

The initial franchise fee may be clear, but the cost of running an outlet also depends on terms requiring you to buy goods from particular suppliers. Such arrangements can help maintain quality and consistency across a franchise network. Before buying, however, you need to understand who sets the prices, how much stock you must purchase and who bears the risk if supplies are disrupted.

1. Establish the full scope of mandatory purchasing

Reading the franchise agreement alone is not enough. Purchasing obligations may also appear in the operations manual, equipment list, technical services agreements and separate supplier terms. Ask for the current version of all these documents before signing.

Draw up a list and note where each item must be purchased:

• Only from the franchisor: specialist ingredients or materials, packaging or finished products.
• From an approved supplier: equipment, furniture, uniforms or cleaning supplies.
• On the open market, to specified standards: items for which you can choose the source.

Next, ask who has the authority to change this list. Can new mandatory purchases be introduced through changes to the operations manual? Will you have to replace equipment even if it still works? Get written terms covering advance notice of changes and responsibility for the costs.

Do not assume that a list obtained from an existing franchisee in another city will apply to you. Transport, availability and local requirements may mean different terms for your outlet.

2. Check the total landed cost, not just the price of the goods

A supplier’s price list represents only part of the actual purchasing cost. Ask for sample invoices and a written quotation for your proposed location. Then break down the following: base price, applicable taxes, freight, insurance, storage, unloading and the potential cost of damaged or unusable goods.

Paying Goods and Services Tax (GST) and being eligible for an input tax credit are separate matters. Check with your tax adviser whether a credit will be available and when you can use it. Do not budget as though it were cash available on the day of purchase.

Ask three questions in particular:

• On what basis can prices change, and how much notice will you receive?
• If prices rise after payment but before dispatch, which price will apply?
• Who receives any supplier discounts, incentives or purchase-based benefits?

If the supplier is the franchisor or an associated company, ask for a written explanation of that relationship. Such a relationship is not inherently improper, but it is useful to understand the financial interests involved. Compare independent quotations for equivalent quality and supply terms, rather than simply comparing against the lowest market price.

3. Test minimum orders and supply disruption scenarios

Mandatory opening stock, monthly minimum purchases and minimum order quantities can tie up working capital. For each critical item, record how quickly you expect to use it, your storage capacity, its expiry date and the replenishment lead time.

Pay particular attention to whether minimum purchases are set by quantity or by value in rupees. A value-based threshold can have a different effect when prices rise, while a quantity-based minimum can leave you with excess stock during periods of slow sales. Ask for the returns and replacement policy for unsold, damaged or near-expiry goods.

Consider a hypothetical situation: a key ingredient or material has not arrived on time, but rent and staff wages are still due. Check the agreement for answers to these questions:

• Will temporary purchasing from an alternative source be permitted?
• Who will approve it, and within what timeframe?
• How should you report short deliveries or defective goods?
• When will a replacement, refund or invoice adjustment be provided?

Where possible, ask existing franchisees in similar geographical circumstances about their supply experience. Do not treat verbal assurances as a substitute for written supply commitments.

4. Understand the law and put safeguards in the agreement

India has no dedicated franchise law, mandatory pre-contract disclosure document or franchise-specific registration regime. This does not mean the business is exempt from regulation: general registration requirements, taxes and activity-specific permissions may apply. You should actively request purchasing information.

The Indian Contract Act, 1872 provides the main legal framework for the validity of agreements, obligations, breaches and remedies. Where consent has been obtained through fraud or misrepresentation, legal remedies may be available depending on the circumstances. Your rights are therefore not confined to the written agreement, but clear terms help reduce disputes.

The Sale of Goods Act, 1930 may apply to sales of goods. The wording of the purchasing agreement will also matter in areas such as quality, conformity with descriptions and acceptance of goods. Exclusive supply or tied-purchasing arrangements may be examined under the Competition Act, 2002. Not every mandatory purchasing clause is automatically unlawful; its nature and effect on competition matter.

Ask a lawyer to clarify the price revision process, approval of alternative suppliers, quality standards, complaint timeframes and remedies for supply failures. If the franchisor and supplier are separate entities, establish each party’s responsibilities.

Practical takeaway: Before making a payment, review the purchasing list, total landed costs and written supply safeguards together. Liking the brand is not enough: the purchasing arrangements must also be commercially viable for your outlet.