Buying a Franchise in India: Check the Resale Terms

Thinking about selling a franchise before you buy it is not pessimism: it is a way to protect your investment. Family needs, health or business priorities can change. But owning the outlet’s equipment does not necessarily mean you can pass the right to operate under the brand to a buyer. Before entering a franchise network, understand the agreement’s transfer provisions so that your exit route does not depend solely on verbal assurances.

1. Selling assets and transferring a franchise are different things

The sale of an outlet may include furniture, equipment, stock and other assets. The right to use the brand name and operate within its business system, however, comes from the franchise agreement. It is risky to assume that both can be transferred through the same process.

Check what counts as a ‘transfer’ in the draft agreement. Is approval required only when selling the whole business, or also when changing partners, selling company shares or changing control? Passing the business to a family member may also fall within the same provision.

Get written answers from the franchisor to these questions:

• Can the existing agreement be assigned to the buyer, or will a new agreement be required?
• Will the buyer receive only the remaining term, or a new term?
• Will the new buyer face different fees or other terms?
• Is there a separate procedure in the event of death or permanent incapacity?

These answers will help establish whether you can sell only the physical assets or also a going concern operating under the brand.

2. What gives you the right to sell in India?

India has no standalone, comprehensive franchise law, mandatory central franchise registration or franchise-specific pre-sale disclosure regime. There is therefore no special franchise law giving you an unconditional right to transfer the business to someone else. General business registration and licensing requirements may still apply.

The Indian Contract Act, 1872 provides the main legal framework for the formation, performance and breach of contracts, and the remedies available. Assigning contractual rights and being released from contractual obligations are different matters. An agreement between the buyer and seller alone does not automatically end the original franchisee’s responsibilities; it is essential to check the necessary consents and documentation.

The Trade Marks Act, 1999 is also relevant to use of the brand. Company, tax and foreign exchange rules may apply depending on whether the transaction involves a sale of company shares, a transfer of business assets or participation by a foreign party. The correct procedure will depend on the structure of the deal.

Have approval, the sale and release from liabilities documented separately. Do not treat a statement in a proposal as a guaranteed right unless it is incorporated into the agreement.

3. Make the approval process clear and time-bound

Simply stating that ‘the franchisor’s prior written consent is required’ does not make the process clear. Ask how a prospective buyer will be assessed. Requirements such as financial capacity, operating experience and completion of training should be understood in advance.

During negotiations, propose the following safeguards:

• A definitive list of documents to accompany the application.
• Written confirmation that the application is complete.
• An agreed deadline for a decision.
• Written reasons for any refusal.
• An opportunity to address shortcomings and reapply.

These are not automatic statutory rights, but protections to negotiate into the agreement. Do not complete a sale on the assumption that silence amounts to approval.

Also check whether the franchisor has a right of first refusal. If so, clarify the price and terms on which it can buy, when it must make its decision and how long you will have to sell to an outside buyer if it declines. An unclear process can put prospective buyers off.

4. Estimate what you will keep, not just the sale price

Permission to transfer the franchise and retaining a worthwhile sum from the sale are two different things. Before buying, ask for a list of all associated costs. These may include transfer fees, buyer training, mandatory equipment upgrades, document preparation costs and outstanding payments.

For each charge, ask: is the amount fixed, or how will it be calculated? Who will pay it? Will any costs paid upfront be refunded if approval is refused? If the franchisor has a role in determining the sale price, understand the basis for that involvement too.

Use a simple calculation: deduct sale-related costs, tax and liabilities to be settled from the proposed sale price. The result is your potential net proceeds. Ask a qualified tax adviser to estimate the tax based on the structure of the deal.

If the buyer must enter into a new agreement, their higher costs may reduce the price they are willing to pay for your business. Do not therefore estimate its potential resale value solely by reference to the current agreement.

5. Complete payment and the transfer of responsibilities together

Before completing the sale, link the necessary approvals, the buyer’s agreement and payment arrangements. Where appropriate, a three-party document between the seller, buyer and franchisor should set out who is responsible for what, and from which date.

Account separately for outstanding royalties, customer advance payments, amounts owed to employees and supplier payments. If there is a personal guarantee or security deposit, obtain written confirmation of its release or adjustment. A buyer’s promise to pay is not the same as the relevant creditor releasing you from liability.

Practical takeaway: before buying, ask a lawyer to prepare a one-page transfer checklist covering what you can sell, whose approval you need, how much it will cost and when your existing responsibilities will end. A clear exit arrangement is part of choosing a good franchise.