Buying a franchise: how to agree terms for business oversight

Joining a franchise network means accepting shared standards, but it does not give the franchisor an unlimited right to inspect your business. Quality checks and reviews of business records may be justified, yet a vague contractual clause can lead to unexpected costs and disruption. Before buying a franchise, agree who may carry out checks, what they may inspect and how any findings will be handled.

1. Separate standards checks from financial reviews

The term ‘business oversight’ can cover very different activities. A visit to an outlet to check its appearance is not the same as a detailed review of accounting records. The agreement should distinguish, at a minimum, between checks on operational standards, verification of data used to calculate fees, and checks that previously identified issues have been resolved.

For each type of check, ask for clear answers to the following questions:

• What is the purpose of the check, and what criteria will be used?
• Which premises, records and systems may be covered?
• Who will carry it out: an employee of the franchisor or an external specialist?
• How often may checks take place, and how long may they last?
• Will you receive a written report and have an opportunity to respond?

In particular, check whether the right of access applies only to the franchised outlet or to your company’s entire business. If the same company carries out other activities, agree how the relevant records will be kept separate. The franchisor may need confirmation of a particular figure, rather than access to every contract, invoice and business plan you hold.

Ask for a sample inspection checklist before signing, too. This will help you assess whether checks are based on established standards or leave room for vague expectations to be introduced later.

2. Place oversight within Croatia’s legal framework

Croatia has no specific franchise legislation, nor a general mandatory system of franchise registration or standardised pre-contractual disclosure of the kind found in some other countries. Franchise agreements are not specifically regulated as a distinct category of contract, so the Croatian Civil Obligations Act, including its principle of good faith and fair dealing, is particularly important in determining contractual rights and obligations.

Depending on the nature of the relationship, other legislation also applies, such as the Croatian Competition Act and relevant European Union rules. If checks involve employees’ or customers’ personal data, the General Data Protection Regulation and Croatia’s Act on the Implementation of the General Data Protection Regulation are relevant. An oversight clause in the agreement does not, in itself, remove obligations to protect that data.

In practice, this means the franchisor’s right of access should be precisely defined in the agreement, rather than assumed to arise from specific franchise legislation. Equally, an internal policy or voluntary code of ethics is no substitute for the law and does not automatically confer unlimited inspection powers.

Have a lawyer review both the agreement and any documents referred to in the oversight clause. Important restrictions should not be left solely in correspondence while the signed agreement permits much broader access.

3. Agree notice, confidentiality and costs

For routine checks, propose reasonable advance notice, timing that minimises disruption and a designated person to accompany whoever carries out the check. Unannounced inspections may serve a legitimate purpose, for example where there are serious grounds to suspect a safety risk or a breach of standards, but the circumstances and scope of such visits should be defined in advance.

For financial reviews, agree how documents will be supplied. Securely transferring specific reports is often more appropriate than providing permanent, unrestricted access to the entire accounting system. Where possible, use separate reports, redact unnecessary personal data or allow records to be viewed without copies being taken.

Confidentiality obligations should also cover external inspectors. Specify the purposes for which collected data may be used, who may access it, and how documents will be retained and deleted, subject to statutory obligations.

Do not leave costs covered by a blanket phrase such as ‘all costs shall be borne by the franchisee’. Distinguish routine checks from additional reviews prompted by an identified discrepancy. If costs can be passed on to you, ask for predefined conditions, documented expenses and a reasonable cap. In your own assessment, also allow for staff time and the accountant’s work required to prepare records.

4. Agree the procedure for dealing with findings

Oversight does not end when the inspector leaves the outlet. The agreement should provide for a written report, a description of any identified discrepancy and a reference to the standard or contractual obligation allegedly not met. Without this, it is difficult to assess whether a demand for corrective action is justified.

Propose a deadline for responding and submitting evidence, followed by a reasonable period to put matters right. A minor administrative error should not be treated in the agreement as equivalent to a serious health risk or deliberate concealment of information. Special measures may be provided for urgent cases, but the grounds for using them must be clear.

Also agree how it will be confirmed that an issue has been resolved: through documents, photographs or a further visit. Check whether a follow-up inspection could incur another charge, and under what conditions.

Practical takeaway: before signing, draw up a brief overview of the purpose, scope, costs and consequences of each type of check. Well-defined oversight protects the franchise network’s standards while giving you a predictable framework within which to run your own business.