Buying a franchise: agree equipment buyback terms before you leave the network

As a franchise buyer, you will often invest in assets that are difficult to use elsewhere: furniture and fittings designed for the network, specialist equipment and branded items. Before joining a franchise network, it is therefore worth agreeing what will happen to these purchases when the relationship ends. A clause simply giving the network the right to buy them back does not guarantee that you will receive any money for them or avoid storage and removal costs.

1. Distinguish a right to buy back from an obligation to buy back

The wording of the buyback clause matters. If the network has a right to buy back the equipment, it can generally choose whether to exercise that right under the agreement. If it has an obligation to buy back, the starting point is different: the purchase is not entirely at its discretion. Even then, the precise wording and any exceptions determine the extent of that obligation.

Also check who holds the right or bears the obligation. The franchisor, the equipment supplier and the incoming franchisee are different contracting parties. A promise that a new franchisee ‘usually buys the equipment’ is not the same as a binding purchase obligation on your existing contractual counterparty.

Ask for answers to at least these questions:

• Does the buyback apply both when the agreement expires normally and when it ends in other circumstances?
• Can the buyer select only the equipment it wants?
• What is the deadline for giving written notice of the buyback?
• What can you do with the assets if the buyback right is not exercised?

Do not accept a situation where you are barred from selling the assets to others but the network has no deadline for deciding whether to buy them. Your equipment could be left waiting for a buyer while storage and finance costs continue to mount.

2. List the assets covered by the buyback

Draw up an asset register alongside your purchasing plan. Separate general-purpose equipment, franchise-specific furniture and fittings, removable branding and any stock for sale. Record which items are covered by the buyback and which are excluded. Include identifying details, purchase dates and ownership information where known.

Checking ownership is important. Leased equipment generally does not belong to the franchisee and cannot be treated as an asset you are free to sell. Equipment bought by instalments may also be subject to a retention-of-title clause. A buyback clause does not, in itself, release you from a separate finance agreement or replace the need for the finance provider’s consent.

Agree on the acceptable condition of the assets too. Distinguish normal wear and tear from inadequate maintenance and damage. Otherwise, a general requirement for ‘equipment in good condition’ could lead to a dispute just when you need to wind down the business.

If the buyback covers stock, set out separate rules for unopened products, items approaching their expiry date and products no longer carried by the network. The same valuation method may not be suitable for both equipment and stock.

3. Agree a pricing method, not a vague notion of value

Terms such as ‘fair market price’ and ‘residual value’ need to be defined. Book value is based on the purchase cost less depreciation. It does not automatically reflect the resale price of used equipment. Nor does the outstanding finance balance tell you what an outside buyer would pay for it.

Possible approaches include a predetermined depreciation schedule or a market valuation by an independent valuer. The key is that you should understand the method before making your initial investment. If a valuer is to be used, agree how they will be appointed, who will pay for the valuation and how any disagreement will be handled.

Also specify whether repair, cleaning, dismantling or transport costs may be deducted from the buyback price, and what evidence will be required to support them. An unrestricted right to deduct any costs the buyer considers necessary makes even an otherwise predictable price uncertain.

Ask your accountant to use the chosen method to calculate examples of the assets’ value at different possible exit dates. Compare the estimated buyback price with the outstanding finance and removal costs. This will show whether you could still have costs to pay on exit even after the equipment has passed to the buyer.

4. Coordinate payment, handover and removal

Alongside the buyback price, you need a timetable. Agree when the assets will be inspected, when the price will be confirmed and when payment falls due. Also define when ownership and the risk of loss or damage pass to the buyer: who is responsible, for example, if equipment is damaged during collection?

Allocate practical responsibilities explicitly. Who will disconnect the equipment, arrange transport and ensure safe storage? Who will remove branding from assets the network does not buy back? If furniture and fittings cannot be reused without alterations, those costs will affect their actual resale value.

Make sure collection is not conditional on finding an incoming franchisee. Your obligation to vacate the premises may arise sooner. Agree what happens if collection is delayed and who pays for additional storage. A written handover record, supported by photographs, helps establish what was handed over and its condition.

5. Understand the Finnish legal framework

Finland has no separate franchise act, statutory franchise disclosure document requirement or franchise agreement registration system. Rights and obligations within a franchise relationship are largely governed by the contract and general legislation. Do not therefore assume that the law requires the network to buy back your equipment.

Relevant legislation includes the Finnish Contracts Act. Under that Act, an unreasonable contractual term may be adjusted in certain circumstances, but seeking an adjustment after the event is no substitute for a clear buyback clause. The Finnish Sale of Goods Act may also apply to sales of movable assets. In business-to-business transactions, the terms of the contract carry considerable weight.

Information provided before the agreement is signed must not be misleading; the Finnish Unfair Business Practices Act is also relevant. If a buyback promise is made during negotiations, ask for it to be included in the agreement as a precise contractual term. Have the agreement and related arrangements reviewed by a commercial contracts lawyer before committing.

Practical summary: accept a buyback arrangement only once you know who the buyer is, which assets are covered, how the price will be calculated, when payment is due and who is responsible for removal. Also assess your investment on the assumption that any optional buyback right is not exercised.