Buying a Franchise in India: Conditions for Opening Multiple Outlets

An offer to open several outlets under one brand may look attractive, but taking on binding commitments to further locations before the first outlet succeeds carries a different level of risk. A sound franchise expansion opportunity is one in which your investment capacity matches your written commitments. Before buying, establish whether you are being given an option to expand or an obligation to open multiple outlets within a set period.

1. Distinguish an option to expand from a binding commitment

Terms such as ‘development rights’ or a ‘multi-outlet package’ do not, on their own, explain what your obligations will be. The actual position will be set out in the main agreement, the development schedule and the separate agreement for each outlet. Read these documents together.

Start by asking for written answers to four questions:

• How many outlets must you open in total, and what is the deadline for each?
• Is opening the next outlet optional, or are you already committed to it?
• Does each new outlet require separate approval and an agreement?
• Which rights or payments will be affected if you do not open the required number?

The meaning of an outlet being ‘open’ should also be defined. Is securing premises enough, or must the fit-out be complete, permissions obtained and trading under way? Different interpretations can lead to disputes later.

If you want to gain experience with one outlet first, ask for an arrangement requiring separate written agreement before proceeding with the next. A representative’s verbal assurance that you will not be pressured to expand is not enough.

2. Link deadlines to approvals and investment

A multi-outlet programme should be more than a list of dates. The sequence for securing premises, brand approval, necessary permissions, building works and staff may differ at each location. Spending on the second outlet could begin before work on the first is complete.

Draw up a table showing each outlet’s proposed opening date, initial payments, commitments relating to premises, building costs and the party responsible. The aim is not simply to calculate the total investment, but to identify how many irreversible commitments you will be taking on at the same time.

Pay particular attention to when the clock starts. If the deadline runs from the date the agreement is signed, but the franchisor must approve the location, its delays could reduce the time available to you. Ask for a written process setting out response times for proposals, reasons for rejection and how to submit a revised proposal.

Also agree how deadlines will be extended if brand approval is delayed or other agreed circumstances arise. Do not assume you are automatically entitled to an extension. It may be worth negotiating an arrangement under which the next stage begins only after a review of the first outlet.

3. Avoid letting one default affect every outlet

One of the most significant risks is a clause under which a breach of one agreement is also treated as a breach of the others. For example, failing to open a third outlet on time could trigger a right to terminate the rights for two outlets already trading. Do not dismiss this as merely a delay at a new location.

Check the development agreement and outlet agreements for the following:

• Are the rights to future expansion separate from the rights to operate existing outlets?
• Will you receive written notice and time to remedy a default before action is taken?
• Can a problem at one outlet lead to all the agreements being terminated?
• Will unused development fees be refunded, credited against other payments or forfeited?

A reasonable negotiating objective may be to limit the consequences of a failure to meet future expansion commitments to the unused rights concerned, allowing compliant outlets to continue operating. This is not an automatic legal protection; it must be expressly agreed in the contract.

Also establish which terms take precedence if the documents conflict. Protections secured in the main development agreement should not be overridden by an outlet’s standard agreement.

4. What protection does Indian law provide?

India has no separate, comprehensive franchise law, central franchise registration system or mandatory pre-sale disclosure document regime. Nor is there a franchise-specific statutory code of conduct. The number of outlets to be opened, the timeframe and the consequences of default are therefore determined mainly by the parties’ agreements.

The Indian Contract Act, 1872 provides the principal framework for contractual validity, free consent, performance, breach and available remedies. Legal remedies may be available where consent was obtained through fraud or misrepresentation, but relief will depend on the facts and the applicable provisions. A failure to meet commercial expectations does not, by itself, amount to fraud.

Depending on the arrangement, the Competition Act, 2002, the Trade Marks Act, 1999, tax laws and local business regulations may also apply. The absence of franchise-specific registration does not exempt individual outlets from ordinary registration and permission requirements. Before signing, have a lawyer review all the relevant agreements together.

Practical takeaway: Commit to multiple outlets only when the number, deadlines, staged payments and consequences of default are clear. In particular, get written agreement on what will happen to existing outlets if future expansion stops.