Buying a Franchise in India: Checking Profit Claims

Claims such as “you will recover your investment quickly” can make a franchise offer attractive. But there is no certainty that a successful outlet’s earnings will be replicated at your location. When entering India’s franchise market, treat profit claims as calculations to verify, rather than a sales pitch to accept. Before paying, understand what information supports the claim, what it leaves out and what written evidence is available.

1. Establish exactly what is being claimed

Ask the franchisor to define every financial term. “Monthly earnings” could mean sales, gross profit, operating profit or the amount left for the owner. These are not interchangeable. If a presentation refers to profit, ask for a list of the costs included and excluded.

In particular, clarify these distinctions:

• Sales: Does the figure include taxes collected from customers? Have returns and discounts been deducted?
• Gross profit: After deducting the direct cost of goods or services, which expenses remain to be paid?
• Operating profit: Have rent, staffing, royalties, marketing and maintenance been deducted?
• Cash surplus: Does the calculation also account for loan repayments, tax and reasonable remuneration for the owner’s work?

Ask how “investment payback” is defined, too. Recovering the initial franchise fee alone is not the same as recovering the full investment. Adding fit-out costs, equipment, deposits and initial losses can change the picture. The point at which the business starts making an operating profit is different from the point at which you recover your entire investment.

2. How relevant is a successful outlet’s performance to your business?

Ask the franchisor whether the projection is based on actual outlet results or a financial model for the proposed business. If it uses actual results, establish the period covered, the number of outlets and how they were selected. The best-performing outlet alone does not represent the whole network.

Useful comparisons are outlets in similar cities, with comparable premises, rents, customer profiles and trading histories. An established outlet may already have a steady customer base, while a new one will need time to build recognition. A company-operated outlet may also have a different cost structure from a franchised outlet.

Get answers to these questions:

• Do the figures cover a full year, or only a festive season or opening period?
• Are the quoted earnings an average, a median result or the highest performance achieved?
• Does the owner work in the business, or is a manager’s salary included in the costs?
• For online sales, have platform commissions, packaging and delivery costs been deducted?

Where possible, request a monthly sales and expense summary that can be checked against supporting records, with confidential information removed. Arrange to speak to existing franchisees with their permission. If you cannot obtain sufficient verification, do not treat the projection as a proven result, and use more cautious assumptions in your own calculations.

3. Rebuild the calculation using local conditions

Work with your accountant to build a sales forecast from the bottom up: likely daily transaction numbers, average transaction value and trading days. Then assess whether that level of purchasing is realistic at the proposed location. Do not assume that everyone passing the premises will become a customer; consider nearby competition and the actual likelihood of a purchase.

Next, use local rental quotes, wages, electricity charges and stock costs. Do not let the franchisor’s general estimates replace the actual costs in your chosen city. Record the basis for each expense—a price list, agreement, local quotation or an estimate that has yet to be verified.

Model three scenarios: expected sales, weaker sales and a slow start. In each case, check whether the outlet can meet its regular expenses and how much the investment payback period changes. Rather than applying an arbitrary percentage reduction, set out why sales might be lower, such as limited footfall or a delay in building awareness of the new location.

If a small change wipes out the claimed profit, the purchase carries substantial risk despite the attractive projection. Do not dismiss this simply by hoping for stronger sales.

4. Understand earnings assurances and your legal rights

India does not have a separate, comprehensive central franchising law, a mandatory franchise-specific pre-sale disclosure document or a central franchise register. This does not mean that false earnings claims are acceptable. The provisions of the Indian Contract Act, 1872 concerning free consent, fraud and misrepresentation apply. Depending on the arrangement, competition, trade mark, tax and other general laws may also apply.

A financial projection is not automatically a guarantee. However, making false factual statements about actual sales or the results of existing outlets is a different matter. If such a statement induced you to enter into the agreement, remedies such as rescission of the contract may be available; any entitlement to damages will depend on the facts and the legal basis of the claim.

Keep dated copies of presentations, messages and calculations. If the agreement states that you have not relied on any assurances outside it, resolve any contradictory sales claims before signing. Ask for essential facts and their supporting basis to be recorded in an annex, and have a lawyer review the terms of any genuine earnings guarantee.

Practical takeaway: Do not invest on the strength of a profit claim unless its meaning, evidence and locally based calculations are clear. Verify the figures first, then check that they align with the written terms.