How to Read a Franchise Agreement in India — 8 Key Clauses

Territory clause

Minimum distance vs exclusive territory — what the wording actually means

Most Indian franchise agreements offer a minimum-distance clause (typically 500 m–2 km) rather than a legally defined exclusive territory. These are not the same thing. A minimum-distance clause only restricts another franchisee outlet of the same format from opening nearby. The franchisor can still open company-owned outlets, cloud kitchens, dark stores, or delivery-only units in your area — unless the agreement explicitly prohibits it. Before signing, ask for the exact wording and test it against three scenarios: (a) a company-owned outlet opens 800 m away, (b) a new franchisee opens a kiosk format inside a nearby mall, (c) the brand launches online delivery from a dark kitchen in your PIN code.

Royalty and fee structure

What counts as "gross revenue", when is it due

Royalty is almost always calculated on gross revenue — not net profit, not net sales after returns, and not revenue minus raw material cost. If your outlet does ₹3L per month in gross revenue at a 7% royalty, you owe ₹21,000 every month regardless of whether you made a profit. Read the definition of "gross revenue" in the agreement carefully — some franchisors include delivery aggregator commissions in your gross revenue figure even though you never receive that money. Royalty is typically due monthly, often by the 10th of the following month, and late payment usually attracts penal interest of 18–24% per annum.

Supply chain and procurement

Mandatory sourcing, pricing disclosure, who sets distributor prices

If the franchise agreement requires you to purchase raw materials, packaging, or branded goods exclusively from the franchisor's approved suppliers, the prices of those supplies are a direct extension of your cost structure. The critical question: does the agreement cap the franchisor's markup on these supplies, or can prices be revised unilaterally? Most Indian franchise agreements are silent on this. Insist on a clause that links supply price revisions to a published index (e.g., wholesale price index) or requires 30-day advance notice of any price increase above 5%. Also check: are you permitted to source alternatives if the approved supplier is unavailable, and who bears the risk of supply chain disruption?

Refit and brand standard obligations

Who pays when the brand updates store design

Franchisors periodically update their store design standards — new signage, new colour schemes, new equipment, new POS systems. The agreement will typically require you to comply with these updates within a specified period (6–18 months is common). The critical detail: who pays? Most Indian franchise agreements place the refit cost entirely on the franchisee. A complete store refit can cost ₹3L–₹15L depending on the brand and format. Check the frequency: can the brand mandate a refit more than once during your agreement term? Is there a cap on the franchisor's ability to require refits? And does refit compliance affect your renewal eligibility?

Exit and early termination

What you owe if you close early, liquidated damages

Exit clauses are the most neglected section of any franchise agreement. If you close before the term ends — whether due to poor performance, personal circumstances, or business failure — you may owe the franchisor liquidated damages: typically the remaining royalty projected over the unexpired term, calculated on average historical revenue. On a 5-year agreement in year 2, this can be a very large number. Check: (a) can you transfer the franchise to another buyer and exit cleanly?, (b) what happens to your fit-out investment and branded equipment at exit?, (c) does the exit clause distinguish between voluntary closure and closure due to force majeure or the franchisor's own breach?

Agreement term and renewal

Is the franchise fee re-payable at renewal?

Most Indian franchise agreements run for 3–5 years with a renewal option. The renewal option sounds reassuring but often comes with conditions: compliance with all brand standards throughout the term, no payment defaults, and — critically — payment of a renewal fee, which may be the full franchise fee again or a reduced amount. Read whether renewal is a right or a conditional option. A "right of first refusal" is weaker than an "automatic renewal subject to compliance." Also check: does the agreement convert to the franchisor's current standard terms at renewal, meaning terms could change significantly from what you originally signed?

Dispute resolution

Which court, which city, which law applies

The jurisdiction clause determines where any legal dispute will be heard. If the franchisor is headquartered in Mumbai and you operate in Coimbatore, a jurisdiction clause that names Mumbai courts is a significant practical disadvantage to you in any dispute. Check: (a) exclusive jurisdiction or concurrent jurisdiction?, (b) is there a mandatory arbitration clause before court proceedings are permitted?, (c) which arbitration institution and seat is specified?, (d) who bears arbitration costs? Many Indian franchise agreements specify arbitration under Indian Arbitration and Conciliation Act, 1996, which is generally enforceable — but the seat city matters enormously for practical cost and convenience.

Non-compete clause

What you cannot do during and after the agreement

Non-compete clauses in Indian franchise agreements typically operate in two phases: during the term (you cannot operate any competing business, including adjacent categories), and post-termination (you cannot operate a competing business in the same area for 1–2 years after exit). Indian courts have historically been reluctant to enforce overly broad post-termination non-competes, but the clause can still create practical uncertainty and litigation risk. Check the scope carefully: "competing business" should be narrowly defined. A clause that prevents you from operating any food business in your city after exiting a QSR franchise is unreasonably broad.