Buying a franchise: what if the master agreement ends?

When buying a franchise in Croatia, you may not be signing an agreement directly with the owner of the franchise system. Your counterparty may be a local master franchisee who develops the network and signs agreements with individual franchisees. This arrangement creates an additional dependency: you could meet all your obligations and still face the consequences if the agreement between the local partner and the principal franchisor ends. Before investing, you should therefore agree what will happen in that situation.

1. Establish which agreement your business depends on

A master franchise arrangement typically links the principal franchisor with a partner responsible for developing a particular territory. That partner then signs sub-franchise agreements with local entrepreneurs, provided they are authorised to do so. These are two separate contractual relationships, and rights under one do not automatically carry over to the other.

Start by asking for a simple outline of the relationships: who is the principal franchisor, who is the master franchisee, and who will sign your agreement? Then ask for confirmation of the local partner’s status from the principal franchisor, along with the relevant sections of the master agreement. You do not need access to every trade secret, but you do need to understand the provisions that could put the continuity of your business at risk.

In particular, check:

• when the master agreement expires and the conditions for renewal;
• whether the local partner is allowed to grant a sub-franchise for a term extending beyond their own contractual term;
• whether the local partner has development obligations whose breach could lead to termination;
• what the master agreement provides for existing franchisees when it ends.

If you cannot review the relevant provisions, ask for written confirmation of these points signed by the principal franchisor. A sales representative’s assurance is not the same as contractual protection.

2. Distinguish legal protection from a contractual promise

Croatia has no dedicated law comprehensively regulating franchise agreements, nor a specific compulsory franchise registration system or a statutory franchise disclosure document. A franchise agreement is treated as an innominate contract — one not specifically defined by statute — and is subject to general rules, particularly the Croatian Civil Obligations Act.

Depending on the nature of the relationship, the Companies Act, Trade Mark Act, Competition Act and applicable European Union competition rules may also be relevant. The European Code of Ethics for Franchising is not law: it does not, in itself, bind every franchisor or replace contractual protection.

This framework does not give franchisees a general, automatic right to continue operating directly with the principal franchisor once the master agreement ends. Equally, it is not safe to assume that every sub-franchise agreement automatically ends at the same moment. The consequences depend on the contractual provisions, the nature of the rights granted and the applicable law.

For an international franchise system, a lawyer should also check the law governing the master franchise relationship. A promise from the local partner that the principal franchisor will take you on is not enough unless the principal franchisor has accepted that obligation.

3. Agree a route to continuity before paying

The most useful protection is not a general statement about cooperation, but a clearly defined process for keeping the business operating. You could propose a three-party agreement between you, the local partner and the principal franchisor, or a separate undertaking from the principal franchisor to you. A lawyer should check its form and enforceability.

Such a document should answer the following questions:

• Trigger: does the protection apply on expiry, termination and any other way in which the master agreement may end?
• Conditions: must you have no overdue payments and no material breaches of your own agreement?
• Continuity: will the principal franchisor take over the relationship, or will you sign a new agreement with them or a new local partner?
• Cost: will existing fees remain in place, or will a mechanism for changing them be agreed in advance?
• Procedure: who gives notice, within what timeframe, and what arrangements apply until the transition is complete?

In particular, negotiate for continued operation not to depend on paying a new initial franchise fee for rights you have already paid for. This is not an automatic statutory right, but a request the other party must expressly accept.

4. Check whether the outlet can operate during the transition

Contractual continuity means little if you simultaneously lose access to the ordering system, mandatory software or supplies. List the functions your outlet cannot operate without, and identify who will provide each one during the transition.

Ask for arrangements covering temporary use of the brand, access to essential systems, supplies and basic support. Also agree who should receive fees after notice that the master franchise relationship is ending, and how any change of payee will be verified. This reduces the risk of conflicting demands from the two parties.

Work through the unfavourable scenario too: continued operation is not possible. In that case, the agreement should clearly allocate responsibility for unused prepaid services and address any potential claims for damages. Do not assume that the principal franchisor is liable for the local partner’s debts without a separate legal basis.

Practical takeaway: before paying, ask for evidence of how long the master franchise rights last and a binding answer to the question of who will enable your business to continue if the local partner loses their franchise.