Buying a franchise: limit your liability for concept changes

When you join a franchise network, you buy the right to use a business concept that will evolve during the relationship. A new look, till system or service model may improve competitiveness, but it can also create a substantial financial obligation for your business. Before signing the franchise agreement, establish how extensively the franchisor can change the concept and on what terms you must fund those changes. Your start-up budget alone does not reveal the full cost of the relationship.

1. Distinguish routine instructions from changes requiring investment

As a franchisee, you agree to follow the network’s operating instructions and quality standards. However, you should not assume that all future updates will be on the same scale, or that responsibility for their costs is self-evident. Changing how customers are greeted is quite different from refurbishing an entire premises.

Ask the franchisor to describe the kinds of changes it can require during the agreement’s term. Review, separately, at least the appearance of the premises, equipment, software, product range and service processes. Also ask which updates are optional and when a previously optional solution can become compulsory.

In particular, clarify the following:

• Who decides on a change, and on what grounds?
• Can a change require equipment that is still usable to be replaced early?
• Can the franchisor introduce new recurring service or system charges?
• Could an update affect staffing levels or skills requirements?
• Are any updates already agreed or being planned that would affect the business you are buying?

Ask for practical examples of previous updates and how they were implemented. These will help you understand how the network operates, but they are no substitute for limits written into the agreement. Modest costs in the past are no guarantee of the price of future changes.

2. Identify the power to make changes granted by the agreement

Finland has no specific franchising law, statutory franchise disclosure document or dedicated procedure for registering franchise agreements. The parties’ rights and obligations are determined largely by the agreement and general legislation. This makes the clause governing development of the concept a key point for a buyer to review.

Franchise relationships are subject to legislation including Finland’s Contracts Act, Competition Act and Unfair Business Practices Act. Under the Contracts Act, an unreasonable contract term may, in certain circumstances, be adjusted or set aside. This does not mean, however, that an expensive update is automatically unreasonable or that a franchisee can simply fail to meet an agreed obligation.

Look for wording that allows the franchisor to change the concept, update the operations manual or issue binding instructions to franchisees. With a specialist adviser, assess whether this authority covers only day-to-day working instructions or also significant new investment. At the same time, check whether a change with a material financial impact requires a separate agreement.

The Finnish Franchising Association’s Code of Ethics is a form of industry self-regulation, not legislation. It emphasises the importance of clearly defining the parties’ rights and obligations. However, the code does not automatically form part of a franchise agreement without an express provision incorporating it. Establish whether the franchisor is committed to the code, but negotiate specific terms on responsibility for costs regardless.

3. Agree cost limits and rules for implementation

A workable change procedure allows the franchisor to develop the shared concept while enabling franchisees to anticipate their obligations. The aim is not to prevent updates, but to avoid an open-ended commitment to all future expenditure.

Negotiate how routine maintenance will be distinguished from exceptional investment. The word ‘reasonable’ alone can leave considerable room for interpretation. A clearer approach may be an agreed limit in euros, a calculation method or a requirement for separate written approval of significant additional investment. Any limit must specify which costs count towards it and over what period.

Cover at least the following points in writing:

• Advance notice: how far in advance will details of the update, a cost estimate and the timetable be provided?
• Allocation of costs: which expenses will the franchisor bear, and which will fall to the franchisee?
• Transition period: will the condition of existing equipment and recent investment be taken into account?
• Implementation: will a phased approach or an alternative solution that meets the requirements be accepted?
• Exceptions procedure: what happens if funding for the update cannot be secured?

Distinguish the franchisor’s commercial updates from changes required by mandatory legislation or safety requirements. For the latter, the parties may not be free to choose the implementation timetable. Even so, it is worth defining responsibilities and communication arrangements in advance.

Consulting franchisees can improve the quality of updates, but a right to be consulted is not the same as a right to approve or veto a change. If review by a franchisee group forms part of the decision-making process, establish what influence that group actually has.

4. Calculate the full impact of an update before deciding

The cost of a concept change is not limited to the invoice for equipment or refurbishment. It may also include installation, staff time spent on training, overlapping software subscriptions, discounting stock being phased out and business interruption. Ask for a cost estimate that addresses direct purchases and operational disruption separately.

With a financial adviser, prepare an alternative forecast for a scenario in which the update goes ahead but the expected sales benefit is delayed. This will show how much financial headroom the business has without assuming immediate growth. Also ask your lender how any additional investment would affect your financing terms. A requirement imposed by the franchisor does not, in itself, guarantee that funding will be available.

If you are buying an existing franchise business, ask both the seller and the franchisor for written details of updates that have been announced but not yet implemented. Establish whether you will have to pay for them immediately after the purchase is completed. Recently refurbished premises may not necessarily meet the requirements of the next version of the concept.

Practical checklist: do not accept open-ended liability for costs without understanding its scope. Before signing, confirm who has authority to decide on changes, how costs will be shared, what advance notice is required and how exceptional situations will be handled.