Buying a franchise: check whether sales targets are binding

A sales target presented by a franchisor may look like an ordinary figure in a business plan. In the agreement, however, that same target may become an obligation: falling short could trigger a remedial process or put the continuation of the franchise relationship at risk. Anyone buying into a franchise network should therefore establish what the target means legally and how performance against it is measured. A business that looks profitable may not meet the contractual sales requirement, while hitting the target alone does not guarantee profitability.

1. Distinguish between a forecast, a target and a binding minimum requirement

Start by reviewing all sales-related provisions together. These may appear in the agreement, business plan, annual target document and franchise operations manual. Look particularly for terms such as minimum turnover, performance requirement, growth target and approved budget. The heading alone does not determine a provision’s significance: you also need to read the obligations and consequences attached to it.

A forecast is an estimate of future performance. A target may guide joint efforts without automatically triggering consequences. A binding minimum requirement, by contrast, may create a contractual obligation. The distinction must be clear from the documents, not merely from a franchise representative’s verbal explanation.

Ask the franchisor to answer the following questions in writing:

• Is achieving the figure an obligation or simply a basis for planning?
• Which document defines any such obligation?
• Does next year’s target require both parties’ approval?
• What happens if the parties cannot agree on a target?
• Could an approved budget later become grounds for alleging a breach of contract?

If the figure is intended only as an estimate, ask for this to be stated clearly in writing. If the franchisor requires a binding minimum, assess it as a separate risk. A franchisee should not have to guess whether they are committing to running the business diligently or achieving a specific sales result.

2. Define the measure before accepting the target figure

A sales requirement is only useful if the calculation is unambiguous. Establish whether it refers to turnover excluding VAT, sales recorded at the till, fulfilled orders or something else. Also record how returns, discounts, bad debts and transactions subsequently cancelled will be treated. Different calculation methods can produce different results for the same business activity.

Pay particular attention to shared sales channels. If a customer orders through the franchise network’s website but the local franchisee carries out the work, whose sales count towards the target? The key issue here is not how sales territories are divided, but whether work performed by the franchisee is credited to their own performance measure.

Agree at least the following:

• Measurement period: will performance be tracked over a calendar year, a contract year or a rolling period?
• Start-up phase: when does the obligation begin, and is a partial trading year taken into account?
• Data source: will the accounts, the till system or the franchisor’s report be decisive?
• Corrections: how will an inaccurate report be corrected, and who will resolve any disagreement?

Ask the franchisor to demonstrate the calculation using a hypothetical example. Include a return and an order recorded in a different month from its fulfilment. Also make sure you will have timely access to the underlying data. Simply being told that you have missed the target gives you no opportunity to check the calculation or take corrective action.

3. Match the requirement to what you can control

A shared business concept does not eliminate local differences. A new outlet, a business with an established customer base and a seasonal location are not directly comparable. Ask why the proposed minimum is appropriate for the business you are buying or the new outlet you are opening. Establish whether the figure reflects local demand or a general growth target for the whole network.

Run your own checks: how many transactions, customers or billable hours would the target require? Can the premises, staffing levels and opening hours accommodate that volume? Consider margins too. Achieving the target through heavy discounting may weaken the business financially, even if the contractual sales measure suggests success.

Next, identify factors outside your control. A disruption to the network’s supplies, a fault in the shared ordering system or a delayed opening may affect sales. Negotiate a written procedure for adjusting the target in these circumstances. Do not assume that a general force majeure clause covers every commercial difficulty.

Also agree what will happen after a shortfall, before more serious action is taken. A practical process includes a joint analysis of the causes, a written remedial plan and a realistic monitoring period. Specify what the franchisee will do and what the franchisor will do. If the franchisor promises sales coaching, for example, the plan needs a named person responsible and a timetable, not just a reference to possible assistance.

4. Check the legal position before signing

Finland has no specific franchise legislation, no statutory requirement for a standard-form pre-contractual disclosure document and no franchise agreement registration system. Sales requirements must therefore be assessed against the agreement and the applicable general legislation. Key statutes include the Contracts Act, the Unfair Business Practices Act and the Competition Act. The Trademarks Act and other rules relevant to the particular business also affect the franchise relationship.

Section 36 of the Finnish Contracts Act allows an unreasonable contractual term to be adjusted or set aside. This does not mean, however, that a sales target which proves difficult to meet will automatically cease to apply. Unreasonableness is assessed in the context of the circumstances as a whole, so you should not base a purchase decision on the prospect of obtaining an adjustment later.

The Unfair Business Practices Act prohibits, among other things, false and misleading statements within the scope of the Act. The sales information supplied by the franchisor and the reasoning behind the target must therefore stand up to scrutiny. The Finnish Franchising Association’s code of ethics binds its members, but it is not law and does not amount to official approval of any particular target.

Have a lawyer experienced in franchise agreements review, in particular, whether the target is binding, how it can be changed and what happens if you fall short. Keep the calculations and written answers received during negotiations alongside the final agreement.

Practical checklist: accept a binding sales requirement only once you know what is being measured, how the figure is calculated, how exceptional circumstances are taken into account and what happens if you fall short. A verbal promise of flexibility is no substitute for a clear contractual term.