Buying a Franchise in India: Check Mandatory Supplier Terms

When buying a franchise, look beyond the initial fee and establish where you will have to buy everyday supplies. The brand may require you to purchase ingredients, packaging or equipment from a particular supplier. This can help maintain consistent quality, but it can also expose you to higher purchasing costs or supply disruptions. A trusting franchise relationship requires clarity about both your purchasing obligations and the supply safeguards you receive in return.

1. Identify the scope of mandatory purchasing

Start by requesting separate lists of mandatory and optional purchases. Must only brand-specific ingredients come from designated sources, or does the requirement also cover cleaning products and standard packaging? This distinction will affect your purchasing costs and your ability to source locally.

Read the purchasing policy, operations manual and supplier’s terms of sale alongside the franchise agreement. If a separate document is incorporated into the agreement, obtain the applicable version before signing.

Ask for written answers to these questions:

• Will you buy directly from the franchisor or from an independent supplier?
• Is the designated supplier a company related to the franchisor?
• Must you use the same supplier for every item?
• Which items could be approved for local sourcing?
• Will purchases from other sources remain prohibited even if they meet the quality standards?

A requirement simply to “purchase in accordance with brand standards” is not clear enough. The items, quality standards and approved sources should be identified.

2. Look at the cost delivered to your outlet, not just the list price

Comparing a supplier’s price directly with local wholesale prices gives an incomplete picture. Compare like-for-like quality, quantities, payment periods and delivery terms. Add transport, packing, insurance, unloading and applicable taxes to the price of the goods to calculate your actual cash outlay. Ask a tax adviser which taxes may qualify for input tax credit.

Obtain sample invoices and a current price list, and check the minimum order value. Also establish whether small orders attract extra charges and whether payment is required in advance or credit terms are available.

Pay particular attention to how prices can change. Will you receive advance notice? Will the old price apply to orders already accepted? Is pricing linked to a clearly defined basis, or is it entirely at the supplier’s discretion?

Ask for details of any commissions or purchase-related benefits the franchisor receives from the supplier. Such benefits are not inherently improper, but franchisees have no automatic entitlement to a share. If any sharing arrangement has been promised, have the calculation and payment terms put in writing.

3. Agree on alternative sourcing if supplies are disrupted

The main practical question with a sole supplier is this: how will your outlet operate if goods do not arrive on time? Knowing the usual delivery lead time is not enough. Ask when an order is deemed accepted and who is responsible for fulfilling it once it has been accepted.

Have the agreement set out procedures for situations where:

• The supplier cannot fulfil an order or delivers less than ordered.
• The materials received do not meet the agreed quality standards.
• Transport disruption makes essential supplies unavailable.
• Urgent approval is needed before using alternative materials.

For emergency purchases, specify who can grant approval, how to contact them and the deadline for a response. Treat a lack of response as approval only if the agreement expressly allows this.

Also ask who pays for testing and approving local alternatives. If a delay forces you to buy at a higher price, who bears the extra cost? If the franchisor does not accept responsibility for supply, examine the actual supplier’s binding terms rather than relying solely on the franchisor’s assurances.

4. Understand the legal position in India

India has no dedicated national franchise law, central franchise register or mandatory franchise-specific pre-sale disclosure regime. You therefore do not automatically acquire freedom to source supplies, or a right to use alternative suppliers, under a specific franchise law.

The Indian Contract Act, 1872 provides the main legal framework for agreements, free consent, performance, breach and remedies. The Sale of Goods Act, 1930 may also be relevant to purchases of goods. The legal implications of quality, delivery and responsibility will depend on the actual transaction and the contract.

Requirements to buy from designated sources may be examined under section 3(4) of the Competition Act, 2002. Such requirements are not automatically unlawful; the question is whether they cause, or are likely to cause, an appreciable adverse effect on competition. Finding a cheaper alternative is therefore not, on its own, a safe basis for breaching a designated-source requirement. If restrictions are extensive, have them reviewed by a lawyer with expertise in competition law.

5. Verify the arrangements before signing

Ask existing franchisees about actual delivery times, unexpected shortages and their experience of obtaining permission to buy elsewhere. Where possible, review orders, invoices and correspondence about delays with sensitive information removed. These examples do not guarantee future performance, but they can help reveal any gap between promises and practice.

Have a lawyer read the franchise agreement and supplier contract together, so that a right granted in one document is not undermined by the other.

Practical takeaway: Before accepting a mandatory supplier arrangement, get the purchasing scope, full costs, delivery responsibilities and emergency alternatives in writing. Quality requirements must be backed by a supply arrangement that allows your outlet to keep operating.