Buying a Franchise in India: Checking Earnings Claims

When buying a franchise, promises of a “quick payback” or “guaranteed monthly earnings” can sound attractive. But a polished presentation is not evidence of what your proposed location will actually earn. A trustworthy franchise partnership depends on understanding the basis of every financial claim. This guide explains how to assess earnings projections using documents, comparable outlets and your own cash-flow forecast before making a payment.

1. Understand the protection the law provides

India has no dedicated central franchising law, franchise-specific regulator or mandatory pre-contract disclosure document regime. Nor is separate franchise registration mandatory before offering a franchise. This does not mean that general business registrations and permits do not apply.

The Indian Contract Act, 1872 applies to matters such as contract formation, consent, fraud, misrepresentation and breach. The absence of mandatory disclosure therefore does not give anyone permission to make false financial claims. Where consent has been obtained through fraud or misrepresentation, remedies such as rescission of the contract may be available; eligibility and other relief will depend on the facts and the applicable provisions.

The Trade Marks Act, 1999, the Competition Act, 2002, applicable tax laws and, where a foreign party is involved, the Foreign Exchange Management Act, 1999 may also be relevant to other aspects of the arrangement. Rights under general law are not limited to those written into the contract. Even so, it is essential to request financial information yourself and have it checked.

2. Clarify what “earnings” means

Ask the brand’s representative whether the figure shown is sales revenue, gross profit, operating profit or cash left after all expenses. These are different measures and should not be used interchangeably.

For every claim, ask for written answers to these questions:

• Does the figure come from an actual outlet, or is it only a projection?
• What period does it cover, and does it account for seasonal fluctuations?
• How are GST (Goods and Services Tax), discounts and returned orders treated in the sales figures?
• Does the profit calculation include rent, royalties, staff wages and the owner’s remuneration?
• Are interest, depreciation, tax and equipment replacement costs excluded or included?

Clarify what “payback” means, too. Some projections show only the recovery of the initial franchise fee, whereas your investment also covers fitting out the premises, equipment, deposits, opening stock and working capital. Covering the business’s monthly running costs is not the same as recovering your entire investment.

3. Ask for evidence from comparable outlets

The best-performing outlet in a major commercial area may not be a reliable benchmark for your proposed outlet in a smaller town or residential neighbourhood. Ask for details of outlets with similar rents, floor areas, customer profiles and lengths of time in operation. Look at the results of new and established outlets separately.

Where available, obtain monthly sales reports, profit and loss statements and summaries of major expenses in a form that protects confidentiality. Ask a chartered accountant how to check whether the available sales records, tax returns and bank receipts are consistent. A table in a presentation is not independent verification.

Alongside averages, ask how many outlets are included and how widely their results vary. Excluding outlets that have closed or changed owners can make the picture look better than it really is. Ask the brand to explain why those changes occurred and how its figures were calculated.

Speak to current and, where possible, former franchisees, with their consent. Ask how their actual cash requirements differed from the initial projections. Do not base your final judgement on one person’s experience.

4. Build a cash-flow forecast for your location

Rather than copying the brand’s calculations, prepare your own forecast using local rent, wages, electricity costs, freight charges and customer numbers. Model three sales scenarios: baseline, weaker and stronger. Do not assume a notional profit margin applies universally.

Start your calculation in this order:

Deduct discounts and returns from sales, then deduct the cost of goods and sales-related expenses, and finally account for fixed costs and other cash payments.

Check the contract to confirm how royalties will be calculated. Minimum royalties, mandatory marketing contributions and technology fees may still be payable when sales are low. Include loan repayments and any money the owner will withdraw for household expenses in your cash-flow plan.

Test what happens if the opening is delayed, sales build slowly or cash becomes tied up in stock. Even a profitable business can run short of cash because of payment timings. Consider where additional capital would come from and what you would do if it were unavailable.

5. Pay only once you have the evidence and terms

Keep dated copies of presentations, emails and financial projections. Seek to have important facts and agreed assumptions included in the signed contract or an annex. Specify which information is historical and which is a forecast; a projection does not automatically become a guarantee.

Have a lawyer review the agreement as a whole, including clauses dealing with the entire agreement, reliance on prior statements and limitations of liability. If you are told that payment is required before you can inspect the documents, agree the refund terms and due diligence period in writing. Do not assume that a franchise purchase comes with an automatic statutory cooling-off period.

Practical takeaway: Do not base an investment on an earnings claim that cannot be substantiated. Obtain the evidence first, prepare a cash-flow forecast for your location, and then make your decision with independent accounting and legal advice.