Buying a franchise: Match the contract term to your investment

When you join a franchise network, you buy access to a business concept for a set period. The contract term therefore needs to suit the investment you are making. A short agreement may leave too little time to recoup your money, while a long one may tie you to a business that fails to meet expectations.

Understand the rules on contract duration

Denmark has no specific franchise legislation and no statutory minimum or maximum term for franchise agreements. Nor is there a dedicated franchise register or a legally required standard disclosure document that the franchisor must provide before the agreement is signed. General business registration requirements still apply.

Franchise agreements are governed by the Danish Contracts Act and general principles of contract law. Freedom of contract is the starting point, but legislation including the Danish Competition Act, Marketing Practices Act and, where relevant, Business Leases Act may impose limits. The absence of specific disclosure rules does not mean that franchisors are free to withhold material information; general duties of good faith and disclosure may still be relevant.

Section 36 of the Danish Contracts Act allows unreasonable contract terms to be amended or set aside. However, you should not treat this provision as a reliable escape route from a long or financially unfavourable agreement. Instead, have the duration assessed before committing yourself.

What matters is not just the number of years stated on the front page. You also need to know when the term begins, what rights you have to terminate on notice during that term, and what payment obligations your commitment entails.

Calculate whether you can recoup the investment within the term

Prepare a separate calculation showing when you expect to recoup the total initial investment. This should cover the amounts that actually need to be recovered through trading, such as the initial franchise fee, fit-out, equipment, professional advice and start-up costs. Distinguish between non-recoverable costs, tied-up funds and assets that might be sold later.

Then make a realistic estimate of the annual cash surplus available to recoup the investment. This should be calculated after relevant operating expenses, including ongoing franchise fees and realistic remuneration for your own work. Agree with your accountant how to treat tax, financing and any subsequent investments so that the calculation is consistent.

Investment payback is not the same as accounting profit. A business can show a profit even when much of its money remains tied up in fixtures, fittings or stock. You should therefore examine cash flows month by month, particularly during the start-up period.

Ask your accountant to prepare at least two scenarios:

• A base case using your best-supported expectations for sales, costs and start-up progress.
• A cautious case allowing for slower customer growth, lower earnings or a delayed opening.

Compare the expected payback date with the contract's confirmed expiry date. If you only recoup the investment just before the agreement expires, there will be little time to earn an actual return. The viability of your original investment should not depend on an expectation that the relationship will continue beyond the agreed term.

Establish when the contract clock starts ticking

A contract term measured from signing does not necessarily give you the same number of years of trading. Finding premises, obtaining regulatory approvals, fitting out the unit and installing equipment can use up part of the term before you serve your first customer.

Read the definitions of the effective date and the start of trading carefully. Also check whether different schedules use different dates. A planned opening date is not automatically the date from which the contract term is calculated.

Clarify the following questions:

• Does the term begin on signing, on handover or on the actual opening date?
• Who confirms and documents that the unit is ready to trade?
• What happens to the end date if opening is delayed?
• Does the agreement distinguish between delays for which you are responsible and other delays?

One possible negotiated solution is to measure the operating term from the actual opening date, combined with a clearly defined deadline for opening. This is a contractual provision, not an automatic right. You should also agree what happens if that deadline cannot be met.

Negotiate the term and investment together

If the payback period is too long relative to the contract term, a longer agreement is not the only solution. You can also discuss a lower initial investment, a smaller-scale launch or a phased set-up, if the concept allows it.

Equally, you should not accept a long term simply because it adds more years to the spreadsheet. Check whether you are committed for the entire period and which ongoing obligations remain if trading disappoints. A long agreement does not, in itself, guarantee earnings or an uninterrupted business relationship.

Finally, ask your lawyer and accountant to review the same timeline: signing, investment expenditure, opening, expected payback and contract expiry. This ensures that the legal commitment is assessed alongside the finances.

Practical takeaway: Only sign once the investment is financially justifiable within the agreed operating term, even under a cautious forecast. Make sure the agreement clearly states the start date, end date and how delays will be handled.