How to Set Franchise Purchasing and Supply Terms in India

Before franchising your existing business in India, you need to establish how the right goods will reach new outlets reliably. Buying for your own outlet and organising supplies for independent operators are different responsibilities. Trust within a franchise network depends not only on quality, but also on clarity over purchasing costs, alternatives and responsibility for delays. Your agreement should therefore include practical purchasing and supply terms.

1. Decide which purchases genuinely need to be mandatory

Rather than requiring every item to be bought from a supplier you specify, categorise goods according to their use and risk. The aim should be to protect brand identity and customer safety, not to control every purchase.

• Purchases from a designated source only: Bespoke blends, proprietary components or materials for which consistency would be difficult to ensure through another source.
• Purchases from approved suppliers: Packaging, equipment or other goods for which several suppliers can meet the same standards.
• Local purchases to defined specifications: General cleaning supplies or non-specialist items whose characteristics matter more than their source.

For each category, record the product specifications, required certificates, acceptable alternatives and the job title of the person authorised to approve them. For example, a designated source may be justified for a brand-specific sauce, while standards for dimensions, strength and design may be sufficient for ordinary tables and chairs. This is a commercial judgement, not an automatic exemption from legal requirements.

2. Understand the legal limits on purchasing restrictions

India has no dedicated franchise legislation, mandatory franchise disclosure document or central franchise registration system. Purchasing rights and responsibilities are largely determined by the agreement. The Indian Contract Act, 1872 provides the basis for contractual validity, performance, breach and available remedies. General rules on fraud and misrepresentation also apply.

Section 3(4) of the Competition Act, 2002 may be relevant to designated sourcing, exclusive purchasing and requirements to buy one product alongside another. Such restrictions are not automatically unlawful; the question is whether they cause, or are likely to cause, an appreciable adverse effect on competition. Factors under Section 19(3), such as barriers to entry, the exclusion of competitors and benefits to consumers, are important.

Document the reasons for mandatory purchases and seek legal review of restrictions that extend beyond what is necessary. Where applicable, food safety, legal metrology, consumer protection and Goods and Services Tax rules must also be followed. Permission under a franchise agreement alone does not make a product legally compliant.

3. Set out the full pricing and ordering arrangements

Franchisees need to understand not just an item's list price, but its total cost delivered to the outlet. The agreement or purchasing schedule should identify the seller, who will issue invoices and who will receive payment. Make it clear whether the brand owner sells goods directly or merely recommends suppliers.

Agree the following points in writing:

• Minimum orders, pack sizes and the ordering process.
• Who pays taxes, freight, insurance and unloading costs.
• Advance payments, credit periods and the consequences of late payment.
• Notice of price changes and their effect on orders already accepted.
• How discounts, commissions or other benefits received by the brand owner from suppliers will be treated.

For commercial transparency, also disclose any related-party relationships with suppliers. Assess freight costs for distant cities and minimum order requirements for low-volume outlets separately. Do not impose purchasing quantities that increase the risk of spoilage or unnecessary stockholding.

4. Provide alternatives for supply disruptions

Where the system depends on a single supplier, delays can affect the entire outlet's operations. Decide in advance when a franchisee may request permission to buy elsewhere: stock shortages, repeated delays, quality failures or transport disruption.

Specify the samples, testing and documentation needed to approve an alternative source. Also state who should receive the request, the agreed response deadline and what may be sold while approval is pending. Emergency permission may be limited to particular items and a defined period; it should not automatically create a permanent right to buy from that source.

Clarify who will bear any additional costs of alternative purchases and whether the franchisor guarantees any particular level of supply. Avoid giving franchisees assurances that go beyond the rights you have secured from your supplier.

5. Allocate responsibility for faulty goods and returns

Set out procedures for checking quantities, packaging, batches and, where necessary, temperature when goods arrive. Separate complaints procedures for visible damage and defects discovered later can be useful. Require evidence such as photographs, invoices and batch details to be retained.

The agreement should specify when risk passes during transport, who will collect faulty goods and how replacements or credits will be handled. Responsibilities for stopping the sale of unsafe products, keeping them separate and recalling them should also be clear. Contractual arrangements for sharing costs do not remove applicable legal responsibilities towards consumers.

Practical takeaway: Before granting your first franchise, draw up a purchasing schedule and test it against three scenarios: a routine order, an unexpected shortage and faulty goods. In each case, it should be clear who makes the decision, who bears the cost and what alternatives are available.