What to Disclose Before Offering a Franchise in India

When franchising an existing business, sending an attractive proposal and a draft agreement is not enough. Prospective franchisees need to understand the rights, costs and responsibilities they will be taking on. Prepare a structured pre-contract disclosure document to help them do so. This document can build trust within the franchising community, but it should be separate from your sales pitch and consistent with the final agreement.

1. Understand the difference between legal requirements and good practice

India has no dedicated franchise legislation, franchise-specific central regulator or mandatory pre-sale disclosure format. Nor is there a franchise-specific statutory deadline for providing a disclosure document before offering a franchise. This does not, however, mean that providing false information or concealing material facts is safe.

The Indian Contract Act, 1872 sets out rules on agreements, free consent, fraud and misrepresentation. Consent obtained through misrepresentation can affect an agreement’s validity and the remedies available to the parties. Review verbal assurances, messages and promotional materials as well.

Other general laws are also relevant. The Trade Marks Act, 1999 concerns brand rights, while certain supply, pricing or exclusivity restrictions may need scrutiny under the Competition Act, 2002. The Consumer Protection Act, 2019 may apply to obligations towards customers; not every commercial franchise dispute automatically qualifies as a consumer dispute. Applicable tax laws and local permits also require separate consideration.

Do not present a voluntary disclosure document as government approval or a guarantee of legal protection. It is a tool for informed decision-making, not a substitute for the agreement or independent legal advice.

2. Set out identity, rights and restrictions in one place

Begin the disclosure document with details of the legal entity that will enter into the agreement and receive payments. Giving only the outlet’s trading name is not enough. Include the legal name, legal structure, registered address, authorised contact and signatory details.

Then clarify the position on rights:

• Who owns the brand, and how the entity offering the franchise obtained the right to authorise its use.
• Whether the relevant trade mark is registered or an application is pending; do not present these as equivalent statuses.
• Which products, services and sales channels the franchisee will be authorised to use.
• Whether territorial rights will be exclusive or other outlets may open in the same area.
• Who will handle online sales, home delivery and orders from large institutional customers.

Include a relevant summary of significant pending disputes or limitations on rights. If information is confidential, use controlled access or a confidentiality agreement. Do not use confidentiality as an excuse to withhold facts that could affect the decision.

3. Explain the terms attached to every payment

This section is a list of payment obligations, not an earnings forecast. In addition to the initial fee, set out royalties, marketing contributions, and payments for technology systems, training, travel, renewal and transfer. For each item, specify the recipient, payment deadline, calculation basis and treatment of applicable taxes.

If royalties are based on sales, define sales. How will returns, discounts, cancelled orders and taxes be treated in the calculation? Highlight any minimum payment. Explain the process for changing fees and how notice will be given.

Keep application payments, reservation payments and the final franchise fee separate. Before accepting any advance payment, state in writing when it will be refundable, what deductions may apply, and what happens if a site is rejected or negotiations end.

For mandatory purchases, explain the freedom to choose suppliers, minimum order requirements and any relevant commissions or benefits received by the brand owner. Have both a tax adviser and the lawyer drafting the agreement review the fee schedule.

4. Make support commitments and exit terms clear

A phrase such as “full support provided” does not help someone make an informed decision. State who will deliver training, where it will take place, who it will cover and who will pay for additional training. Also explain the distinction between help with site selection and final site approval.

Similarly, clarify responsibilities for opening support, regular inspections, complaint handling and promotional materials. Separately list the franchisee’s responsibilities for staffing, local licences and day-to-day operations.

Clearly explain the agreement’s term, renewal conditions, opportunities to remedy breaches, and rules on termination and transfer. Also set out what happens after termination, including removal of branding, handling of remaining stock and settlement of outstanding payments. The accessible summary in the disclosure document must not obscure strict conditions in the final agreement.

5. Keep evidence of delivery and revisions

Give every version a date and version number. Provide the draft agreement alongside the disclosure document, allowing reasonable time for independent legal and financial review. Do not describe this as a mandatory waiting period prescribed in India.

Keep a written record of the candidate’s questions and your answers. Prevent sales representatives from making additional promises without approval. If fees, rights or other material terms change before signing, provide revised documents and another opportunity for review. Obtaining an acknowledgement of receipt is useful, but it does not make an inaccurate statement true.

Practical takeaway: Before accepting the first franchise-related payment, bring together information on identity, rights, payments, support and termination in one document. Then check that your promotional materials, disclosure document and agreement all say the same thing.