Buying a franchise: limit the franchisor’s rights to require changes and investment

When you join a franchise network, you buy the right to use a concept that will continue to evolve. A new till system, a brand refresh or replacement equipment may improve competitiveness, but can also increase your funding needs. Before buying a franchise, establish how far the franchisor can change operating requirements and what you will have to pay for. Knowing the initial investment is not enough if the costs of later upgrades remain open-ended.

1. Establish where the power to make changes actually lies

The right to require changes will not necessarily appear under an investment heading in the agreement. It may be embedded in an obligation to follow the current operations manual, concept specification, equipment list or IT requirements. If the franchisor can update these documents unilaterally, your practical obligations as a franchisee may also change.

Ask to see the agreement and its schedules, along with all the guidance you are committing to follow. Record the date and version of each document. Also establish their order of precedence: which takes priority if the signed agreement conflicts with a subsequently updated manual?

Draw up a separate list covering at least the following types of change:

• furniture, fittings, décor and the appearance of the premises
• machinery, equipment and their approved suppliers
• till, ordering and reporting systems
• product range, packaging and mandatory stock levels
• installation and implementation work required by new operating methods.

For each, ask whether it is a recommendation or a binding requirement. Also establish whether the franchisor can change only technical operating procedures, or fees and other key commercial terms as well. These should not be left to a single catch-all clause.

A simple assurance that changes are usually minor does not limit a broadly worded contractual right. Ask for any clarifications to be included in the agreement you sign or in a schedule to it.

2. Understand the legal position in Finland

Finland has no franchise-specific legislation or compulsory registration system for franchise agreements. Nor does it require a statutory franchise disclosure document in a prescribed format. This does not, however, mean there are no legal limits on how agreements may be drafted or franchises marketed.

The Finnish Contracts Act and general principles of contract law, including the duty of loyalty between contracting parties, are relevant to the relationship. Section 36 of the Contracts Act allows an unreasonable contractual term to be adjusted or set aside. In a business-to-business agreement, this is assessed case by case, so do not base your purchase decision on the assumption that a broad variation clause will inevitably be disregarded later.

The Finnish Unfair Business Practices Act prohibits, among other things, false or misleading statements likely to affect the supply of or demand for goods or services, or to harm another business. If a major concept overhaul is already being planned, information about its costs may be material to your purchase decision. Ask about planned changes in writing.

The Finnish Competition Act and EU competition rules may also affect the assessment of terms requiring purchases from specified sources. An obligation to buy from a particular supplier does not, in itself, make a term unlawful; the arrangement needs to be assessed as a whole.

The European Code of Ethics for Franchising is a form of self-regulation, not Finnish law. Establish whether the franchisor has committed to it and how that commitment is reflected in the agreement. An ethical commitment is no substitute for precisely defining responsibility for costs.

3. Negotiate a change procedure and cost limits

The aim is not to prevent the franchise network from developing. It is to distinguish routine updates from changes that require substantial additional funding from franchisees. A sound agreement explains the grounds for making a change, how notice will be given and who pays.

Cover at least the following points in negotiations:

• Advance notice: how far in advance will you receive a written description, timetable and cost estimate?
• Scope of costs: as well as equipment, will the estimate include installation, termination of existing contracts, staff time and downtime?
• A cap in euros: can a maximum franchisee contribution be agreed for an individual upgrade or a specified period?
• Approval: which changes exceeding the cap will require a separate written agreement?
• Transition period: can serviceable equipment remain in use until the end of its useful life, or can the upgrade be phased in?
• Exceptions: how will essential changes required for safety or legal compliance be handled?

Also agree whether purchases relating to the same upgrade will be counted together. Otherwise, a cost cap may lose its value if the project is split into several smaller orders.

If the franchisor requires investment towards the end of the agreement’s term, ask how long it is expected to take to pay for itself. Where necessary, negotiate a delay, a contribution from the franchisor or another written solution. An obligation to invest does not, in itself, guarantee renewal of the agreement.

Finally, establish what happens if there is a dispute over whether a change is necessary or how much it costs. Simply consulting franchisees does not mean they have the right to approve or reject a change.

4. Test the terms against a specific upgrade

Ask the franchisor to describe a concept upgrade it has already carried out: what was replaced, how franchisees were informed and what made up the costs. Where possible, speak to franchisees who were involved. Practical experience can help identify costs that an equipment quotation alone will not reveal.

Then run through your own scenario. Assume the franchisor requires you to replace the till system midway through the agreement’s term. Review the agreement and answer these questions: who chooses the supplier, who pays the outstanding charges for the old service, and who bears the cost of any interruption to sales during implementation?

Take the costs you identify to your lender for assessment. Approval of start-up funding does not automatically cover later upgrades. If the investment would require a new loan, establish before signing what will happen if funding is unavailable.

Have the variation clauses reviewed by an independent commercial contracts lawyer. Give them the relevant sections of the operations manual too, as reading only the main agreement may leave financial obligations hidden.

Practical checklist: do not sign until you know what the franchisor can change, how much those changes could cost you and what procedure protects your business from large, unforeseen investment requirements.