Buying a Franchise in India: Who Pays for Discounts?

When buying a franchise, do not assess profitability solely on sales at standard prices. Mandatory discount campaigns, free products or membership benefits offered by the brand can change your actual earnings. Before entering the Indian franchise market, it is essential to understand who pays for the savings offered to customers. This guide focuses on checking your control over selling prices and discounts, and the financial responsibilities that come with them.

1. Establish who has the authority to set prices and discounts

The prices shown in the brand’s presentation may not reflect the pricing rights set out in the agreement. Ask whether the price list is merely recommended or mandatory. Are different prices permitted across cities, outlets and sales channels?

Alongside the draft agreement, request the operations manual, promotions policy and online sales terms. Reading only the main document is not enough if it makes other policies binding too. In particular, check whether the brand can change those policies without your consent.

Get written answers to these questions:

• Will participation in national and festive campaigns be compulsory?
• Can you opt out of a campaign because of your costs?
• Whose approval is needed to offer or withdraw a local discount?
• Can the brand change prices directly in your sales software?
• Who has the authority to set different prices in-store, on the brand’s app and on other online platforms?

A verbal assurance that “we always consult you” is not adequate protection. Consultation and your written consent are two different things.

2. Calculate the true cost of every offer

A discount is not just an amount deducted from the bill. Buy-one-get-one-free offers, free delivery, gifts, loyalty points redemptions and the acceptance of old vouchers can all impose costs on the outlet. Look beyond the campaign’s name to the financial impact of each element.

Ask the brand for sample instructions from previous campaigns and settlement statements with personal information removed. These should clearly show the value of the benefit received by the customer, how much the outlet bore and how much the brand reimbursed. Whether reimbursement comes as cash, a credit against the next invoice or additional stock matters. Extra stock will not necessarily help you cover immediate expenses.

Calculate the contribution per order: excluding tax, take the actual sales proceeds plus any confirmed campaign reimbursement, then deduct the cost of goods, packaging, delivery and other direct variable costs. This is not your final profit: rent, wages and other fixed costs still need to be covered.

Assess standard-price sales, discounted sales and sales where several offers apply together separately. Even if order numbers rise, total contribution can fall.

3. Put reimbursement and participation terms in writing

Propose making the campaign policy an explicit appendix to the agreement. It should do more than state that “the brand will provide support”: it should specify how that support is calculated and how claims are made.

Seek these safeguards during negotiations:

• A cap on costs: how will your maximum liability for a campaign or a defined period be set?
• Advance notice: how much notice will you receive to prepare and review costs?
• The basis for reimbursement: which sales will qualify, and what evidence will be required?
• Exceptions: who will bear losses from customer returns, cancelled orders and voucher misuse?
• A route to challenge errors: what rights will you have to inspect records and request corrections if calculations are wrong?

If the brand can change the terms of future campaigns, ask for a requirement to obtain your consent to additional costs, or an option to opt out. Do not assume this is an existing legal right; negotiate it as an explicit contractual protection.

4. Understand the limits of Indian law

India has no separate, comprehensive central law governing franchising, no mandatory national franchise disclosure document and no franchise-specific registration system. Do not therefore assume that you will automatically receive full details of promotional costs. General business registration and compliance requirements may apply separately.

The Indian Contract Act, 1872 applies to questions concerning agreements, free consent, performance and breach. In cases of misrepresentation or fraud, remedies such as rescission of the contract may be available, depending on the circumstances; compensation is not automatic in every case. Keep important assurances in writing.

The Competition Act, 2002 is also relevant. Certain resale price maintenance arrangements may be scrutinised for their effects on competition. Not every uniform pricing or promotional policy is automatically unlawful. Have a specialist review any clause imposing minimum selling prices, restrictions on discounts or penalties.

Under the Consumer Protection Act, 2019, offers communicated to customers must not be misleading. Ask a chartered accountant to check the tax and invoicing implications of discounts and reimbursements.

5. Check actual experience before signing

With the brand’s permission and appropriate confidentiality safeguards, ask existing franchisees how promised reimbursements were actually received, which claims were rejected and what happened when they opted out of campaigns. Compare instructions for previous offers with the settlement records available.

If the policy is unavailable, or the answer is “we will decide later”, do not treat the cost as settled. In your financial plan, also test a campaign scenario in which the expected reimbursement does not arrive.

Practical takeaway: before signing, agree three things in writing: who will approve discounts, your maximum cost and how you will be reimbursed. An offer that increases sales is only useful if your outlet remains financially sustainable.