Buying a Franchise in India: Check the Advertising Fees

When buying a franchise, it is easy to focus on the initial fee and royalties, but regular advertising contributions also affect cash flow. A major brand campaign is no guarantee of more customers at your outlet. To ensure transparency in your franchise relationship, understand before you buy how advertising fees will be calculated, who will decide how the money is spent, and what accounts you will receive.

1. Have all advertising-related payments listed separately

Ask the brand for a complete schedule of advertising-related charges. This should separately identify contributions to the shared advertising fund, any mandatory local marketing budget, the launch campaign, digital platform fees and promotional materials. Ask whether local spending counts towards your shared fund contribution or whether you must pay both.

If the fee is a percentage of sales, read the definition of sales in the agreement. Does the calculation include goods and services tax (GST), returned orders, customer discounts and delivery platform commission? Which outlet will online orders be attributed to? Knowing the percentage alone is not enough.

Ask your accountant to calculate every charge using actual or estimated sales for a typical month. Run a separate calculation for a low-sales month. If there is a fixed minimum contribution, you may still have to pay it when sales fall. Also obtain written confirmation of when fees start, how often they are charged and what late-payment charges apply.

2. Understand how the shared fund is used and controlled

A shared advertising fund can build brand recognition, but not every contributor will necessarily receive the same local benefit. Do not rely solely on terms such as “national advertising”. Review past campaigns and available spending statements to understand the brand’s priorities.

Get written answers to these questions:

• Is the fund held in a separate bank account or simply recorded separately in the accounts?
• Does it also cover advertising agency fees, administration, content creation and technology platforms?
• Does the fund pay for advertising to recruit new franchisees?
• On what basis do company-owned outlets contribute?
• Is any year-end balance carried forward or used for another purpose?

If payments go to an affiliated agency, ask about the selection process and the basis for its fees. A separate bank account does not, by itself, guarantee independent oversight. The permitted spending categories, who makes the decisions and the reporting arrangements matter more.

3. Establish your right to information in India

India has no dedicated central franchising law, mandatory national franchise disclosure document or franchise-specific registration system. Nor is there a general franchise disclosure rule requiring a standardised statement about the advertising fund before a franchise is sold. This does not mean that ordinary business registration and compliance requirements do not apply.

The Indian Contract Act, 1872 provides the main legal framework for the formation, performance and breach of agreements, and the remedies available. Where fraud or misrepresentation affects consent, legal relief may be available depending on the circumstances; an unsuccessful campaign does not automatically amount to misrepresentation.

The Central Goods and Services Tax Act, 2017, together with the relevant state and interstate tax provisions, may be relevant to the tax and invoicing treatment of advertising fees. Have the tax treatment checked against the actual nature of the payment.

Rather than assuming you automatically have the right to fund reports, inspection and independent review, have these rights expressly included in the agreement. Assurances made during a sales presentation are more useful when incorporated into the signed agreement or an addendum.

4. Check who bears the cost of local promotions and discounts

The brand may run the advertising while your outlet bears the cost of discounts. Ask whether participation in campaigns is compulsory or optional, who funds customer discounts and when any reimbursement will be paid. Include additional costs such as platform fees and packaging in your calculations.

Understand the approval process for local promotions. Can you run joint promotions with nearby organisations? What is the deadline for approving materials? If you do not spend the mandatory local marketing budget, must you pay the unspent amount to the brand?

Ask at least two existing franchisees about their experience of these processes. The same campaign can have different effects depending on the city, customer base and how established the outlet is; do not treat their experience as a guarantee.

5. Build measurable accountability into the agreement

Discuss with your lawyer how to include regular spending summaries, annual fund statements, permitted expenditure and a process for raising questions in the advertising provisions. If independent review is available, its scope, frequency and cost should be clear. Rather than seeking a guarantee of customer numbers, ask for transparency about campaigns, spending and how results are measured.

If the brand has the right to change fees or its spending policy, check the requirements for advance notice, limits on increases and whether your consent is needed. Also read any clause allowing significant changes to be introduced solely through the operations manual.

Practical takeaway: Before signing, set out five points on one page: the amount payable, the calculation basis, permitted uses, the reporting timetable and the process for changes. Wherever an answer is unclear, seek clarity in the agreement rather than relying on verbal assurances.