Buying a Franchise in India: Check the Minimum Sales Requirements

A sales target in a franchise proposal may look like a routine business expectation. But if that target is a binding requirement in the agreement, failing to meet it could expose you to additional payments, reduced rights or termination. Before entering the Indian franchise market, understand how much the brand expects you to sell, how sales will be calculated and what missing the target would actually mean.

1. Distinguish between forecasts and binding targets

Projected sales in a brand’s presentation are not the same as the minimum sales specified in the contract. The former may be a business forecast; the latter may become a binding obligation. Read not only the presentation but also the schedules to the agreement and any operating manual incorporated into it.

Get written answers to these questions:

• Is the target monthly, quarterly or annual? Can stronger sales in one month offset a weaker month?
• Does ‘sales’ mean money actually received from customers or the total value of invoices issued?
• How will taxes, cancelled orders, customer returns and discounts be treated in the calculation?
• Which outlet will receive credit for online orders, particularly where fulfilment and payment are handled through different arrangements?
• What evidence will establish whether the target has been met, and how will discrepancies in the figures be reconciled?

Minimum sales and minimum purchases are also separate requirements. Buying stock from the brand is not proof of sales to customers. If both obligations apply, you could end up with money tied up in unsold stock.

2. Test whether the target is realistic locally

A network-wide target will not necessarily suit your proposed location. Shop size, opening hours, local footfall, competition and seasonal demand may differ. Ask about the experience of outlets operating in comparable conditions; do not use only the most successful shop as your benchmark.

Translate the target into day-to-day requirements. Divide the required monthly sales by the number of trading days to work out the daily sales needed. Then use the average transaction value to calculate how many paying customers you would need each day. Does that seem achievable given the location, staffing and service capacity? Work with a chartered accountant to prepare cash-flow budgets for both normal and weak sales scenarios.

For a new outlet, ask for an initial settling-in period. Clarify whether the target applies from opening day or after a specified period. There should also be an agreed process for adjusting the target if the brand stops supplying goods, essential systems are unavailable or the outlet is temporarily closed by government order. Do not assume that relief will be automatic.

Check the right to increase targets too. The basis for increases, review frequency, advance notice and any requirement for your consent should be set out in writing. Wording such as ‘as determined by the brand from time to time’ can leave your future obligations uncertain.

3. Put the consequences and remedial process in writing

Missing a target once and consistently underperforming are different situations. The contract should make the consequences of each clear. Check whether a shortfall triggers an additional fee, the loss of a particular right, an improvement plan or a right to terminate the agreement.

If a payment is required, ask for a worked example. Will the amount be based on the sales shortfall, or will a fixed sum be payable? Will other regular payment obligations continue to apply as well? This will help you understand how much additional pressure weak sales could put on your cash flow.

Negotiate the following elements of a balanced process:

• Written notice of the shortfall, with the relevant sales details;
• An opportunity to correct errors in the figures;
• A clear, realistic period in which to improve performance;
• An improvement plan setting out the responsibilities of both the brand and the franchisee;
• A method for reassessment and a process for reaching a final decision.

A verbal assurance that ‘we never enforce the targets’ is not adequate protection. The arrangement you have agreed to should be reflected in the signed documents.

4. Understand the legal position in India

India does not have a standalone, comprehensive franchise law, a mandatory franchise-specific pre-sale disclosure document or a central franchise registration system. Franchise relationships are governed primarily by the agreement and applicable general laws. This does not mean that every contractual term is automatically valid or conclusive.

The Indian Contract Act, 1872 provides the principal framework for contractual validity, free consent, performance, breach and remedies. The agreed procedure matters where termination is linked to a sales target. A contractual penalty for breach is not necessarily recoverable in full in every case; legal rules on reasonable compensation may apply. The remedies available in cases of fraud or misrepresentation will depend on the facts.

Before signing, have an independent lawyer review the target, payment and termination provisions together. The practical takeaway: accept a target only if you understand how it is calculated, it matches local capacity and the agreement provides a clear opportunity to remedy any shortfall.