Buying a Franchise in India: Check Restrictions on Other Businesses

When buying a franchise, do not focus solely on what the new outlet will be allowed to sell. Also check which other businesses you will be prohibited from pursuing while the agreement is in force. A non-compete clause could conflict with your existing business, investments or expansion plans. Protecting a brand’s confidential information is a legitimate aim in franchising, but buyers should understand the actual scope of any restrictions before committing.

1. Clarify what counts as a ‘competing business’

Restrictions on other businesses often appear under clauses dealing with ‘non-competition’, ‘exclusivity’ or ‘conflicts of interest’. Reading only the relevant heading is not enough. Check the definitions, operational obligations and documents attached to the agreement as well.

For example, someone buying a café franchise may already run a bakery. The position will differ depending on whether the restriction covers only directly competing cafés or extends to all food businesses, potentially bringing the bakery within its scope.

Ask for written clarification:

• Which products, services and sales channels will be considered competitive?
• Does the restriction cover only running a business, or also investing in it, advising it or working for it?
• What geographical area does the restriction cover, and how long will it apply?
• Will any new services the brand launches in future automatically fall within the definition?

Ask for clear categories and examples rather than vague terms such as ‘similar business’. This helps clarify both parties’ expectations.

2. List your existing interests and secure written exemptions

Simply telling the brand verbally about your other shop is not sufficient protection. Before signing, prepare a list of your businesses, partnerships, shareholdings and professional roles. Where relevant, include online sales and businesses operating from shared premises.

Then assess each interest against the proposed restriction. For an existing business, ask for an explicit exemption in a schedule to the agreement. This should record the business name, its activities, your involvement and the scope of its permitted operations. Also establish whether opening another branch of that business would require separate consent.

Read wording covering family members and affiliated entities particularly carefully. An agreement does not automatically bind someone who has not signed it, but it may seek to make you responsible for ensuring that a connected person does not engage in competing activities. Before accepting such a responsibility, ask a lawyer to explain its limits.

You can also seek separate provisions for passive investments. For example, holding shares in a listed company without management control is not the same as running a directly competing shop. Do not leave the scope of an exemption to assumptions.

3. What Indian law does — and does not — say

India has no separate central law governing franchising, dedicated regulator or mandatory pre-sale disclosure regime. Nor is a separate central franchise registration required to grant a franchise. This does not remove the need to comply with general business laws or obtain the necessary registrations.

Section 27 of the Indian Contract Act, 1872 is important here. Subject to certain legal exceptions, it generally treats agreements restraining trade, business or a profession as void to the extent of that restraint. However, restrictions that apply during the agreement’s term and those that apply after it ends are not assessed in the same way. Some restrictions during the term may be valid; it would be wrong to assume that every broad restriction is automatically lawful.

The Competition Act, 2002 may also be relevant where an arrangement has an appreciable adverse effect on competition. The mere use of the word ‘exclusivity’ does not automatically make a clause unlawful. Its effects and commercial context need to be considered.

So do not assume either that every restriction will be enforceable once you sign, or that you can disregard it simply by citing Section 27. Obtain an independent legal review of the actual wording.

4. Agree the consent and breach procedures in advance

If you need the franchisor’s consent to start another business, ask whom you should apply to, what information you must provide and what deadline will apply for a response. Propose objective criteria for decisions and written reasons for any refusal. Do not treat silence as consent unless the agreement expressly says that you can.

Read the consequences of a breach too. Will you receive notice and an opportunity to remedy it? Will you have the option of selling an investment or separating out an activity? Does the agreement provide for immediate termination or a claim for damages? Merely specifying a sum in the agreement does not automatically guarantee that it can be recovered in full; the applicable law also matters.

Factor the financial impact of the restrictions into your investment plan. If taking on the franchise means giving up a profitable existing business, that is part of the true cost of your decision.

Practical takeaway: Before signing, put the restricted activities, exemptions for existing businesses and process for obtaining future consent together in writing. Do not base your investment on an assurance that ‘permission will come later’.