Buying a Franchise in India: Check Minimum Sales Requirements

The sales forecast in a franchise proposal and the minimum sales obligation in the agreement are two different things. A forecast indicates the business’s potential; failing to meet a contractual obligation can affect your rights or costs. If you are new to franchising, you need to understand not just the target figure, but also how it is calculated and what happens if you fall short. Before paying, check whether the pressure to generate sales creates a contractual commitment you may be unable to meet.

1. Distinguish forecasts, targets and guaranteed payments

Read all references to sales in the proposal, financial forecasts and final agreement together. Do not treat ‘expected sales’, ‘performance targets’ and ‘minimum guaranteed payments’ as interchangeable. Ask which figures are purely for planning and which could form the basis of a breach of contract.

In particular, distinguish between:

• Sales target: An expectation that you will achieve a specified level of sales within a set period.
• Minimum purchase requirement: An obligation to buy a specified quantity or value of goods from the brand, whether or not you sell them.
• Minimum payment: A requirement to pay a fixed amount even if actual trading falls below expectations.

All three may appear in the same agreement. Get written clarification on whether a sales shortfall automatically creates a payment liability or merely triggers a review. A representative’s assurance that ‘the target is just a formality’ is not enough. If such an exemption matters to you, have it included in the final signed document.

2. Clarify the calculation method and measurement period

An unclear definition of the target can lead to disputes even when the business is performing well. How will sales figures account for tax, returned goods, cancelled orders, customer refunds and discounts? Which outlet will receive credit for online orders? Will sales be measured by money received from customers or by the value of invoices issued?

Also agree which records will determine the final figure. If the brand’s reports differ from your accounts, the reconciliation process, the person responsible and the deadline for raising objections should be set out in writing. Both parties should have access to the same information when measuring performance against the target.

Monthly, quarterly and annual targets have different implications. In a seasonal business, stronger sales later on may offset a weak month, but this only helps if the agreement allows it. Ask whether sales above target can be carried forward to the next period.

Negotiate a separate target or a settling-in period for the early stages of trading. Be clear whether the sales obligation begins on the actual opening date or on a fixed date. Also record how the target will be adjusted if the brand delays supplying equipment or stock.

3. Secure a meaningful opportunity to improve if you miss the target

Reading the target alone is not enough; find every clause that sets out the consequences of missing it. Could a shortfall lead to extra payments, changes to exclusive rights, reduced support or termination of the agreement? Have these consequences set out separately so you can understand how many risks a single shortfall could create.

Before buying, propose a process that includes:

• a written explanation and calculation of the shortfall;
• an opportunity to correct errors in the records;
• a joint review to understand the causes;
• an improvement plan with a reasonable timeframe;
• clear criteria agreed in advance for the next review.

Stock shortages, disruption to the brand’s systems or operating restrictions imposed by the brand can reduce sales. The agreement should specify whether these circumstances will lead to a lower target, an extended measurement period or a temporary suspension of the obligation. Do not assume relief will be automatic.

Include a weak-sales scenario in your cash-flow forecast. Check whether you could still cover minimum payments, rent and other costs at the same time. Do not treat a sales target as evidence of profitability: a business can make substantial sales and still operate at a loss.

4. Understand the legal position in India and make your final checks

India does not have a separate, comprehensive national franchise law, a generally mandatory franchise-specific pre-sale disclosure document or a franchise-specific government registration system. Nor is there a generally applicable statutory code of conduct specifically for franchising. You should therefore not expect an automatic entitlement to standardised information about sales targets or a uniform statutory period in which to remedy a shortfall.

The Indian Contract Act, 1872 provides the main legal framework for contract formation, free consent, performance, breach and remedies. Rules on fraud and misrepresentation also apply. If false claims have been made about whether a target is achievable, the remedies available will depend on the facts, evidence and applicable provisions. A demanding target is not automatically unlawful, and simply stating an amount in the agreement does not guarantee that it can be recovered in full in every circumstance.

Ask a lawyer to review the target clauses alongside those setting out the consequences of a shortfall, and ask an accountant to assess the cash-flow impact of weak sales. Compliance with applicable tax, competition and other general business laws remains a separate responsibility.

Practical takeaway: Before signing, get four answers in writing: what will be measured, when it will be measured, what happens if you fall short and how much opportunity you will have to improve.