Buying a franchise: how to agree terms for business inspections

Franchisors want to check that outlets meet shared standards, while franchisees need to know how much these checks will affect day-to-day operations. Inspections can help maintain quality across a franchise network, but a vague contractual clause can lead to unnecessary costs and overly broad access to records. Before buying a franchise, agree on the scope, procedures and limits of inspections, rather than simply granting the franchisor a general right to ‘monitor the business’.

1. Separate standards checks from financial reviews

Checking an outlet’s cleanliness is not the same as examining its accounts. In the draft agreement, distinguish between product and service quality checks, checks on compliance with operating standards, and reviews of financial data relevant to contractual obligations. For each type of inspection, it should be clear what will be checked and what evidence will be used.

Ask for a sample checklist and report before signing. This will show you whether the outlet is assessed against measurable requirements or the inspector’s subjective impressions. Also check whether the criteria you must meet are available in the documentation you receive before committing.

Use the agreement or a schedule to clarify:

• which premises, processes and documents the inspector may examine;
• whether financial reviews are limited to the franchise business;
• which period may be reviewed;
• whether copies and photographs may be taken;
• how departures from the required standards are identified and documented.

If the same company also runs other businesses, take particular care to protect records unrelated to the franchise. Access to the full set of accounts should not be the automatic response to a need to check one outlet.

2. Agree on notice, frequency and costs

Reasonable inspections should be practical without causing unnecessary disruption. Propose a rule that routine inspections require advance notice, take place at an agreed time and have an estimated duration. Specify who receives the notice and who accompanies the inspector at the outlet.

An unannounced inspection may serve a legitimate purpose, for example where advance notice would prevent a reliable quality check. However, the agreement should distinguish such a visit from an extensive request for financial records. The right to visit without notice need not mean the right to obtain all business records immediately.

Settle the costs before the first inspection. Check who pays for routine inspections, external specialists, travel and repeat visits. If the franchisor wants to pass costs on to the franchisee following an identified failure to meet standards, ask for clear conditions governing such charges, evidence of the costs incurred and a way to challenge the findings.

When assessing the investment, draw up your own list of hidden costs: the manager’s time, report preparation, an accountant’s involvement and any downtime. These are not necessarily fees paid to the franchisor, but they are costs of complying with the agreement. Avoid an open-ended obligation to pay ‘all inspection costs’ without a clear description and limits.

3. Limit access to data and set confidentiality rules

Croatia has no specific franchise law or mandatory standardised pre-contractual franchise disclosure document. A franchise agreement is an innominate contract, meaning it is not a separately defined contract type under Croatian law. Its contractual framework is governed primarily by the Civil Obligations Act, including the principle of good faith and fair dealing. Do not, therefore, make assumptions about the scope of inspection rights: check exactly what the agreement provides.

If an inspection involves employees’ or customers’ personal data, the General Data Protection Regulation (GDPR) and Croatia’s Act on the Implementation of the General Data Protection Regulation also apply. An inspection clause does not, by itself, justify unrestricted sharing of personal data.

For each request, ask whether its purpose could be achieved through an aggregated report or a document from which unnecessary personal data has been removed. The parties’ roles, the lawful basis for access and the necessary safeguards should be assessed according to how the data is actually processed, not simply the title of the agreement.

External inspectors should also be bound by confidentiality obligations. Agree on who receives the records, what they may use them for, how long they retain them, and how they protect and delete or return them. In particular, check whether the franchisor can appoint someone connected with a competing outlet, and propose an independent specialist where there is a conflict of interest.

4. Ensure you receive written findings and an opportunity to respond

An inspection should not end with an unsupported verbal assessment. Ask for a written report setting out the standard checked, the facts established, the records supporting the conclusion and the proposed next steps. Distinguish between a recommendation for improvement and an allegation of a breach of contract.

Agree on a deadline for receiving the report and a procedure for submitting comments or objections. It is useful to provide for disputed findings to be reviewed by another responsible person or an independent specialist, with the allocation of costs agreed in advance. Do not assume that raising an objection automatically suspends any contractual consequences: this also needs to be clarified explicitly.

Before signing, work through a hypothetical case, from notice of an inspection to resolution of the findings. If it is unclear who does what, what evidence is available to them and who pays, the clause needs further work.

Practical takeaway: accept inspections that have a clear purpose, but insist on measurable criteria, limited access to records, predictable costs and the right to submit a reasoned response.