Buying a franchise: Clarify future investment requirements

When you buy a franchise, the opening budget is only the beginning. Later, the franchisor may want new fixtures, a different shop layout or new digital systems. These developments can strengthen the franchise network, but you may be left to foot the bill. Before signing, you should therefore establish who can decide on future investments and how the agreement protects your ability to plan your finances.

1. Identify the right to require changes

Start by finding all provisions covering development of the franchise concept, modernisation, technical standards and equipment replacement. These may appear in the franchise agreement, but also in schedules or an operations manual referred to in the agreement.

The key question is not simply whether you must follow the franchise concept. It is whether the franchisor can change the requirements along the way, imposing costs that were not known when you bought the franchise.

Ask for specific answers to the following:

• What types of changes can the franchisor require?
• Can the requirements be changed without your consent?
• Who pays for equipment, installation, training and any downtime?
• Is there a notice period, a spending limit or any provision for exceptions?
• What happens if you cannot finance the change?

Distinguish between routine maintenance and substantive changes to the franchise concept. Replacing a worn-out counter is not necessarily the same as replacing a fully functional fit-out because the chain is adopting a new visual identity. Ask for the agreement to address this distinction clearly.

2. Understand the Danish legal framework

Denmark has no specific franchise law. Nor is there a franchise-specific statutory requirement to provide a pre-contract disclosure package or to register franchise agreements with a public authority. General business registration requirements still apply.

Franchise agreements are governed by the Danish Contracts Act and general principles of contract law. Depending on the change, legislation including the Danish Competition Act, Marketing Practices Act, Sale of Goods Act and Business Lease Act may also be relevant. For example, a refurbishment may require separate discussions and agreement with the landlord.

There is no specific franchise rule that automatically caps your future investment obligations. Whether the franchisor can require a particular change therefore depends primarily on the wording and interpretation of the agreement, together with the general rules applicable to the relationship.

Depending on the circumstances, general duties of good faith and disclosure may require material information to be disclosed before the agreement is entered into. You should therefore ask explicitly whether the franchisor is already planning changes that will require investment by new franchisees. Ask for the timetable and the expected impact on your outlet.

Ethical codes within the franchise sector are not Danish law and do not automatically apply to everyone. Do not treat a general reference to a spirit of co-operation as a substitute for specific investment terms.

3. Examine both the track record and the full cost

Ask for examples of mandatory upgrades from recent years. The aim is not to obtain a guarantee about the future, but to understand how the franchisor makes decisions and allocates costs.

Ask how much time franchisees were given to implement the changes, whether local exceptions were allowed and whether the chain contributed financially. Also establish whether equipment already purchased could remain in use.

Then prepare a separate cost estimate for a potential upgrade. Include more than the supplier's price:

• Removal and disposal of existing equipment.
• Delivery, installation and alterations to the premises.
• Staff time spent on training and adapting working practices.
• Temporary closure or reduced capacity.
• New ongoing costs for licences, servicing and maintenance.

A new ordering system, for example, may require screens, network upgrades and subscriptions. A low purchase price therefore does not tell the whole story.

Also clarify whether the investment must be made at the same time across all outlets, or whether the timing can take account of the age of existing equipment and local operations. Ask your accountant to assess the financing required and the impact if the expected increase in turnover fails to materialise. The chain's expectation of improved performance is not, in itself, evidence that the investment will pay off for your business.

4. Negotiate a clear decision-making process

The aim is not necessarily to prevent development. A franchise network needs to be able to improve its concept. The aim is to make decisions and your financial obligations predictable.

Consider proposing written notice, a documented cost estimate and a spending cap for mandatory changes that can be required without your separate consent. If you agree a cap, specify which costs it covers and whether several smaller changes will be added together over a defined period.

The agreement can also set out a process for deferral or an alternative solution where existing equipment still meets the functional requirements. Distinguish between changes needed to comply with the law and commercial preferences for a new look.

Pay particular attention to investments required close to the expiry of the agreement. Negotiate in advance whether special limits or an agreed financial arrangement should apply where you will have only a short period in which to use the investment. Have a lawyer check that these protections are not undermined by a broad variation clause elsewhere in the agreement.

Practical rule of thumb: Do not just buy into today's concept. Also establish clear rules on who can change it, how quickly changes must be implemented and how much you can be required to pay.