Franchise agreements: settle this before unit one

The person selling your product, hiring the staff, setting the tone at the counter and handling your customers does not work for you. You cannot performance-manage them and you cannot move them. Everything you want them to do has to be in the document. Everything you left out is something you will later have to ask for as a favour.

India has no dedicated central franchising statute. These relationships run on ordinary contract law and on whatever the parties wrote down. There is no standing rulebook waiting to fill the gaps, which is precisely why a vague clause is expensive here.

Territory is the clause people regret

Fix the geography, then fix what exclusivity means inside it. A radius, a pin code list, a named catchment: pick one and draw it, because a phrase like the Indiranagar area is not a boundary. Then answer the harder question: does exclusivity bind only your other franchisees, or you as well.

The part that gets missed is channel. Your own website ships to that pin code. Your quick commerce listings are visible from inside their store. A modern trade account down the road stocks the same pack. If the agreement is silent the franchisee will read exclusivity as covering all of it, and you will discover that during their first bad quarter. Write down which channels are carved out, and decide now whether an online order fulfilled inside their territory earns them anything at all.

Term and renewal sit next to this. Give a term long enough for the franchisee to recover what they invested. Make renewal conditional on performance and on refitting to the current format rather than automatic. State whether the territory travels with a renewal.

The three places money changes hands

Franchise economics usually have three components. They behave differently, so choose deliberately instead of copying a template.

• A joining or entry fee. Paid once, normally against training, launch support and the right to use the brand. It is cash for you at signature, which is exactly why it should never be the reason you sign somebody.
• An ongoing royalty on the unit’s sales. This ties you to revenue and only to revenue. It is charged on the top line, so it is paid in full in a month when the unit made no money.
• Margin on the goods you supply. The quietest of the three. It does not appear in the agreement as a rate at all, only as a price list, which means you can change your effective take by changing prices unless the agreement says how and when prices may move.

Say in writing which of these exist, what each is charged on, when it is paid and what governs a change. Say what the fee does not buy, because the franchisee will assume it buys marketing. A marketing fund is a fourth line with its own rules on who contributes and who decides where it is spent.

Whose name is on the lease, and whose name is on the customer

Two ownership questions decide what you are left holding when a unit changes hands. Take the lease first. If the franchisee holds it, a location you spent years building is theirs to walk away with, or to reopen under another brand. If you hold it and sub-let, you keep the site and you also keep an obligation you cannot exit when the operator goes. There is no free option here. Write in what happens to the fit-out, the signage and the deposit at the end.

Then the customer. Billing records, phone numbers, loyalty enrolments, the store’s listing on maps, and the local social handle somebody in the store created without asking. State that these are yours, that the franchisee may use them for that unit and only while the agreement runs, and that they are handed over intact and usable at the end. All of this is far easier to write at signature than to argue about afterwards.

Standards only exist if somebody inspects them

The format has to be an attachment, not an adjective. Layout and fixtures, the assortment the unit must carry, opening hours, the service routine, the billing and reporting system, how promotions run, and who has authority over the retail price. Then the enforcement half, which is what gets left out: who inspects, how often, what result triggers what, how long the franchisee gets to fix a failure, and what happens when it repeats.

Write the ladder explicitly. Notice, a cure period, withdrawal of marketing support or of supply, and finally termination. A standards clause with no inspection right and no consequence attached to a breach is a wish.

Stock, and the argument it turns into

Minimum purchase obligations are normal and reasonable. They are also the most common source of a franchise dispute, because a commitment agreed in an optimistic month becomes a back room of unsold goods in a bad one. Settle it in the document. How the minimum is calculated and how often it is reviewed. Whether the franchisee may refuse a push. Who decides markdowns and who funds them. What happens to inventory in hand when the relationship ends.

Silence on that last point is the classic mistake. A franchisee closing a unit is sitting on your branded product, and if nothing says whether you buy it back and at what price, it gets discounted into the market you were trying to protect.

How it ends, and the day after

Write the ending while everyone is still enthusiastic. Termination for cause with the breaches listed. Termination for convenience if either side wants that, with the notice that applies. Then the day after: signage down by a stated date, use of the brand stopped, systems access revoked, customer data returned, stock dealt with, and whether they may open a competing business in that catchment and for how long.

Add transfer. Franchisees sell their businesses and fall out with partners. Say whether the unit may be transferred, whether you hold a right of first refusal, and that any incoming owner must be approved by you and trained before they take the counter.

One caution, and it is not a formality. A franchise agreement is a legal instrument and this article is not legal advice. Have a lawyer draft it and have a lawyer review it, on both sides, before either party signs. The cost of that review is trivial next to the cost of a clause you copied from a template you found online.