Buying a franchise: is the contract term long enough to recover your investment?

When buying a franchise, it is easy to focus more on the initial franchise fee and opening costs than on the length of the agreement. Yet the contract term determines how far ahead your business can plan to use the franchise model on the agreed terms. Anyone joining a franchise network should therefore treat the contract term as a foundation for their investment decision: can you recover the money invested before your right to operate the franchise expires?

1. Establish when your usable contract term begins

Start by distinguishing between the signing date, the date the agreement takes effect and the date your outlet opens. These are not necessarily the same day. If a fixed-term agreement starts when it is signed, but refurbishment, training and preparations take time, part of the term will pass before you make your first sale.

Ask the franchisor for a written timeline covering at least the following points:

• When does the agreement take effect, and when does its fixed term start running?
• What is the planned opening date?
• What is the final day of the agreement?
• Will the end date change if opening is delayed?
• Who is responsible for the costs of delays in different circumstances?

Do not assume that a delayed opening automatically extends the agreement. If you want the operating term to begin when you open, this must be agreed precisely. It is also worth defining what counts as opening: the first day you serve customers, for example, or the date the franchisor approves the outlet as ready to operate?

If the agreement is open-ended, do not treat it in your calculations as an unlimited right to operate. Assess how much operating time is actually secured under its termination provisions. Ask a specialist to check your interpretation before making an investment decision.

2. Calculate payback without assuming a renewal

Base your initial investment calculation solely on the period secured by the agreement you are about to sign, subject to its terms. A franchise network's long history, or the fact that franchisees usually receive renewals, does not in itself guarantee that your business will be able to continue.

Include the initial franchise fee, alterations to the premises, equipment, system implementation and other start-up expenditure. Separate one-off investments from ongoing costs so that you do not count the same expense twice. Base your VAT treatment on your business's actual entitlement to deduct VAT, and check any uncertain items with your accountant.

Next, estimate how much cash the business will generate towards recovering the investment after normal operating expenses, ongoing franchise fees, reasonable remuneration for your own work and taxes. Turnover or accounting profit alone will not tell you whether the investment has paid for itself. Nor does depreciation mean that the money invested has returned to the business as cash.

Keep the project's payback calculation and the cash flow forecast for loan repayments separate, but review them side by side. Loan principal repayments affect your ability to meet payments, even though they are not expenses in the profit and loss account. A lender's approval does not, in itself, show that the contract term is long enough to recover your investment.

Consider at least three scenarios: starting up as planned, slower sales growth and a delayed opening. For each scenario, record how much of the contract term remains after the investment has been recovered. If payback occurs only at the very end of the term, there is little room for weaker demand or unexpected costs.

3. Assess the value of your investments at the end of the term

Not all start-up expenditure has the same residual value. You may be able to sell general-purpose equipment, but a branded fit-out or initial franchise fee may yield nothing once the agreement ends. Permanent alterations to the premises may have to remain there.

Prepare an investment breakdown, assessing the following for each significant item:

• its acquisition cost and estimated useful life;
• who owns it and any rights held by a lender;
• whether it can be used after the franchise agreement ends;
• its realistic resale value and the costs of selling it;
• the terms of any contractual buyback arrangement.

Do not count a buyback by the franchisor as guaranteed income unless a binding obligation and a method for determining the price have been agreed. A right to buy does not amount to an obligation to purchase. The book value of equipment may also differ from the price it will actually fetch.

Include any potential removal, transport and reinstatement costs. Their purpose in the calculation is not to predict failure, but to show how much value the business will actually retain from the investment at the end of the term. A financial plan is stronger when it does not rely on an optimistic resale value for equipment.

4. Negotiate the term before finalising finance

Finland has no dedicated franchising legislation or statutory registration system for franchise agreements. Nor is there a mandatory pre-contract disclosure document in a prescribed format. Relevant legislation includes the Finnish Contracts Act, the Unfair Business Practices Act and the Competition Act. The Trademarks Act governs protection of the franchise network's trade marks.

Under the Contracts Act, an unreasonable contract term may be adjusted in certain circumstances, but you should not base an investment decision on that possibility. The law provides no general guarantee that a franchise investment will have enough time to pay for itself. You need to assess whether the contract term is sufficient before committing.

The Finnish Franchising Association's Code of Ethics is a form of self-regulation binding on its members, not legislation or official approval of an individual agreement. Check whether the franchisor is committed to the code, but still assess the dates and financial implications of your own agreement separately.

If the payback period and contract term do not align, possible negotiating options include a longer initial term, an operating term that begins on opening, or a smaller initial investment. A renewal right only helps your calculations to the extent that its conditions are clear and achievable. A promise to negotiate later is not the same as an agreed extension.

Share the same timeline with the franchisor, lender, accountant and the lawyer reviewing the agreement. This ensures that everyone assesses the same overall position rather than working from different assumptions about how long the business can operate.

Practical reminder: do not commit to an investment simply because the monthly profit looks healthy. Make sure the agreed operating period is also long enough to recover your investment without relying on an uncertain renewal.