How to Set Franchise Purchasing and Supply Terms in India

When expanding your existing business into a franchise network, do not treat purchasing arrangements as simply a list of suppliers. A delay you can resolve over the phone at your own shop could bring sales to a halt at a distant outlet. Before granting a franchise, decide which items will be mandatory, how their prices may change and what franchisees can do if supplies are interrupted. A clear purchasing policy balances quality control with franchisees’ commercial independence.

1. Do not apply the same purchasing restrictions to every item

Start by dividing your purchasing list into three categories. The aim is to identify where control is necessary to protect the brand’s identity and where local sourcing may be more appropriate.

• Brand-specific items: Special blends, bespoke packaging or materials whose substitution would change the customer experience. These may need to come from a designated source.
• Standard items subject to quality requirements: Cleaning products, general equipment or raw materials. Here, written specifications and a choice of approved suppliers are more useful than relying on a single vendor.
• Locally sourced items: Things such as office supplies that do not directly affect brand identity or product safety. Avoid unnecessary central control over these purchases.

Record the reason for each restriction. Simply saying, “We have always bought from this supplier” is not a sufficient commercial justification. Where an alternative source may be acceptable, set out the process for sample testing, required certificates and approval.

2. Clarify the full cost and how prices can change

An item’s purchase price is not its total cost. Transport, taxes, minimum order quantities, storage and the risk of spoilage can change the cost for an outlet in another city. Do not assume that the prices paid by your existing outlet will automatically work for every franchisee.

The purchasing policy should make clear:

• Who will sell the goods and who will issue the invoice.
• Who will pay for transport and insurance.
• What the minimum order quantities and payment terms will be.
• How price changes will be communicated and how much notice will be given.
• Whether confirmed orders will be charged at the old or new price.

If the brand owner earns a margin on resale or receives commissions or incentives from suppliers, explaining the nature of those arrangements to franchisees helps build trust. Do not describe this as a legally mandatory disclosure without a sound basis; make it part of transparent business practice. Treat purchase prices and retail selling prices as separate matters.

3. Set out procedures for delays, defective goods and supply interruptions

Statements such as “supplies will arrive on time” do not prevent disputes. Specify separate expected timeframes for accepting, dispatching and delivering orders. Allow for remote locations, festivals and any special transport requirements.

The goods receipt procedure should include checks on quantities, packaging condition, batch details and shelf life. Record temperatures where necessary. Agree in advance what evidence must accompany a complaint and who will decide whether to replace the goods or issue a credit. Include a suitable procedure for defects that are not apparent on delivery.

Alternative supply arrangements are particularly important. For example, if the designated packaging is unavailable, may a franchisee temporarily use safe, unbranded packaging? Who will authorise this, and how quickly will approval be given? Do not treat silence as approval in such situations.

If unsafe products need to be recalled, set out in writing who is responsible for identifying affected batches, stopping sales, handling customer complaints and sharing the costs.

4. Ensure purchasing terms comply with Indian law

India has no dedicated central franchising law, mandatory franchise registration or general franchise-specific pre-contract disclosure regime. This does not mean that purchasing restrictions can be imposed without legal review.

The Indian Contract Act, 1872 provides the basis for the validity of agreements, contractual obligations and remedies for breach. Make clear how the purchasing policy is incorporated into the agreement and the limits on changes to it. Do not rely on vaguely worded powers to impose unexpected costs on franchisees.

Under the Competition Act, 2002, exclusive supply arrangements, tie-in purchasing requirements and resale price restrictions may be subject to scrutiny. Not every designated-source arrangement is automatically unlawful; its nature and effect on competition matter. Obtain specific legal advice on terms that control retail selling prices.

Under the Consumer Protection Act, 2019, liability for defective products and deficient services will depend on the circumstances and the role of the party concerned. Food businesses should also check the requirements of the Food Safety and Standards Act, 2006 and applicable rules. A contract between the parties does not remove statutory responsibilities.

5. Test the purchasing arrangements before granting your first franchise

Test the full cost, delivery time and complaints process for a representative order destined for another city. Check whether the system works without relying on the founder’s personal contacts. Give the approved supplier list a version number and an effective date.

Practical takeaway: Before granting a franchise, prepare a purchasing policy, a price revision process and contingency arrangements for supply interruptions. Align these with the franchise agreement and give franchisees an opportunity to understand the purchasing obligations before accepting them.