Buying a franchise: contract length and recovering your investment

When joining a franchise network, it is not enough to ask how many years the contract lasts. What matters more is how much time you will actually have to trade and whether you can recover your investment within that period. A long contract does not guarantee security: it can also mean a long-term payment commitment for a business that fails to deliver the expected results. You should therefore assess the contract term alongside your investment plan, before signing and taking on financial commitments.

1. Establish when the contract term actually begins

Find the precise point in the draft agreement from which its term is calculated. This could be the signing date, the date the agreement takes effect or the date the outlet opens. These dates are not necessarily the same, and the difference directly affects the time available to recover your investment.

If the contract begins on signing, fitting out the premises, obtaining the necessary approvals and preparing to trade may use up part of the term before your first sale. Do not assume that the expiry date automatically moves because the outlet has not yet opened.

Ask for written answers to three questions:

• What event starts the contract term, and how is it evidenced?
• What is the expiry date if preparing the outlet takes longer than planned?
• Are any fees payable before trading begins?

Check the answers against the contract provisions, rather than relying solely on the sales presentation. For your financial assessment, use the actual trading period, from the expected opening date to the agreed expiry date. This will help you avoid a plan that includes more revenue-generating months on paper than you will actually have.

2. Calculate payback using cash flow, not just profit

The initial franchise fee is only part of the investment. List the costs of fitting out the premises, equipment, opening stock, professional services, staff training and the cash needed to cover the initial shortfall. Separate non-recoverable costs from amounts that might be refunded under certain conditions, such as some deposits.

Then work with an accountant to prepare a monthly cash-flow forecast for the entire contract term. Accounting profit is not the same as cash available to recover your investment. Available cash is affected by stock levels, customer payment terms, taxes, loan principal repayments and subsequent equipment replacement.

Include reasonable remuneration for your own work in the calculation. If the business only looks viable because you work unpaid for several years, the plan does not reflect the full economic cost of the venture.

Distinguish between two assessments:

• Payback on the total investment: can the business justify all the funds needed to launch it, regardless of how they are financed?
• Payback on your own capital: when will you recover the money you have personally invested, after payments to lenders and other outgoings?

Do not mix these calculations or count the same expenditure twice. Supplement your base-case forecast with a more cautious scenario, allowing for slower revenue growth and higher expenditure. If recovering your investment depends on almost flawless performance right up to the final month of the contract, there is little margin for error.

3. Do not assume assets are worth what you paid for them

At the end of the contract, the equipment may remain yours, but its usefulness and resale value may be limited. Bespoke fit-outs, branded fixtures and specialist equipment often cannot easily be transferred to a different business concept.

For each major investment item, record its owner, expected useful life, potential alternative uses and a conservative estimate of its value when the contract expires. Check whether the contract requires you to remove branding or particular fit-out elements, and budget for the associated costs.

Do not treat an equipment buyback by the franchisor as guaranteed income unless it is clearly provided for in the contract. Nor is an asset’s book value a guarantee of its selling price.

In your base-case calculation, do not assume you will continue trading under the same brand after the contract expires. Assess any possible continuation separately. This tests whether the investment is justified by what you are actually agreeing to today, rather than by a future agreement that has yet to be reached.

4. Link your financial assessment to Croatia’s legal framework

Croatia has no dedicated law comprehensively regulating franchising, nor a specific statutory system of mandatory pre-contractual disclosure for franchise agreements. A franchise agreement is an innominate contract — one not specifically defined as a separate contract type in law — governed by the general provisions of the Croatian Obligations Act, including the principle of good faith and fair dealing and the rules on the performance and termination of obligations.

Depending on the nature of the relationship, the Croatian Competition Act and applicable European Union rules may also be relevant. The European Code of Ethics for Franchising is a self-regulatory standard, not Croatian law or a guarantee that you will recover your investment.

There is no general statutory term for franchise agreements that ensures you will recover the money invested. Give your lawyer your financial plan as well as the draft agreement. Ask them to check whether the period during which you can exercise the agreed rights matches the timeframe used in your calculations, and whether any provisions alter that assumption.

Practical conclusion: before signing, put the opening date, expected investment payback date and contract expiry date on a single timeline. If there is no reasonable buffer between payback and expiry to allow for setbacks, negotiate a longer term or a lower investment — or reconsider the purchase.