How franchising works in India

What a franchise is

A franchise is an agreement. One business, the franchisor, allows another person, the franchisee, to use its brand name and way of working. The franchisee runs the outlet and pays the franchisor.

The outlet is usually owned and funded by you. The brand gives you its name, training and supply. You still carry the business risk.

India has no separate franchise law. A franchise is a private contract. So the written agreement is what protects you.

Franchisor and franchisee

The franchisor owns the brand and the system. It sets the rules for look, products and prices of service.

The franchisee invests money, hires staff and runs the daily work. You are not an employee of the brand. You are an owner who follows the brand's rules.

Common formats

Brands use different names for different set-ups. The same word can mean different things in different companies, so ask for a plain explanation in writing.

• Unit franchise: you run one outlet.
• Master franchise: you get rights over a city or state and may appoint sub-franchisees.
• FOFO (franchise owned, franchise operated): you own and run the outlet.
• FOCO (franchise owned, company operated): you invest, the company runs it.
• COCO (company owned, company operated): the company owns and runs it. This is not a franchise for you.
• Dealership: you buy goods from a company and sell them in your area.
• Distributorship: you hold stock and supply to retailers.
• Agency or business correspondent: you act for a company or bank and earn a commission.

What you pay

Costs differ by brand. Ask for every cost in one written list before you decide. Do not rely on a verbal total.

• Franchise fee: a one-time payment for the right to use the brand.
• Royalty: a regular payment, often a share of sales or a fixed amount.
• Marketing fee: a payment towards the brand's advertising.
• Security deposit: money held by the brand. Ask when and how it is returned.
• Fit-out: shop design, furniture, equipment and signboard.
• Stock: the first lot of goods.
• Working capital: money for rent, salary, power and bills until the shop earns.

Tax on fees

Franchise fees and royalty are payments for a service, and GST may apply on them. The rate and the code can change. Ask your chartered accountant (CA) and ask the brand to show GST on each invoice.

If a brand asks you to pay without a proper invoice, treat that as a warning.

Is it right for you?

A franchise gives you a known name and a tested method. It also gives you fees, rules and less freedom. A famous name does not guarantee profit.

Read the other guides on this site before you pay anything.