Franchise agreement duration: align the term with the investment

When you turn an established business into a franchise network, the duration of the agreement is more than a legal detail. It sets the timeframe within which franchisees can plan their investments and you can develop the network. A term that is too short, or unclear renewal arrangements, can make financing harder to secure and delay necessary purchases. Base the term on your business’s actual timescales, rather than another network’s agreement template.

1. Start with the investment timeline

In your own business, you can decide year by year whether to continue. A franchisee, however, commits money to a concept whose use is governed by an agreement between two independent businesses. They need to assess how long they can operate on the agreed terms. As the founder of the franchise network, you need a similar planning horizon for training, systems and ongoing support.

Before drafting the agreement, draw up a timeline of the franchise unit’s major commitments. Include, for example:

• alterations to premises and the purchase of fixtures and fittings
• equipment finance and lease terms
• the start-up period and the time needed for sales to stabilise
• expected equipment replacements and premises refurbishments
• any subsequent investments required by the concept.

Distinguish between the accounting depreciation period, the finance repayment period and the investment’s estimated payback period. These are not the same thing. It is not enough to justify the agreement term by saying that the equipment will be fully depreciated by the end of it if the franchisee’s cash flow will not yet have covered the initial investment.

Use actual data from your own operations, but allow for the different start-up circumstances of a new unit. Also consider what happens if sales grow more slowly than expected. The aim is not to promise a payback, but to identify whether the proposed term makes the investment difficult to justify from the outset.

Set out your assumptions explicitly. If the proposed term relies on steady demand, limited repair needs or a particular equipment lifespan, these are estimates, not guarantees. This also allows franchisees and their lenders to assess the timeframe from their own perspectives.

2. Choose the agreement type and define the start date

A franchise agreement can be for a fixed term or an indefinite period. A fixed-term agreement generally provides an agreed period of cooperation, but it also binds both parties. Poor profitability alone does not usually entitle a franchisee to end the agreement early. With an indefinite-term agreement, the termination provisions have a substantial bearing on how predictable the business’s future will be.

Do not simply compare the number of years with the notice period. Consider how much continuity the arrangement as a whole offers in relation to the franchisee’s obligations. An indefinite-term agreement with a short notice period can be a difficult basis for substantial investments that are suitable only for that particular concept.

Also define when the agreement term begins. Signing, the start of training and the opening of the outlet may all take place at different times. If the term begins on signing, a lengthy preparation period can reduce the time available for actual trading.

Set out separately the obligations during the preparation phase and the duration of the right to operate the franchise. Specify how a delayed opening affects the term, who must report the delay and when the timetable will be reviewed. Avoid leaving the start date to a later discussion based on people’s recollections.

3. Make renewal a predictable process

The possibility of renewal is not the same as a right to continue. The agreement must make clear whether it renews automatically, whether the franchisee can exercise an agreed renewal option, or whether continuation requires a new agreement approved by both parties.

If renewal is subject to conditions, describe them precisely enough. These might include compliance with contractual obligations and completion of specified refurbishments. A simple requirement that the franchisor must be satisfied leaves the franchisee facing uncertainty that is difficult to assess.

Set out a written renewal timetable:

1. When will renewal first be discussed?
2. When will the franchisee receive the terms and details of any required investments?
3. By what date can any shortcomings be remedied?
4. When must both parties communicate their decisions?

Allow time for decisions before the franchisee has to renew a significant finance or lease commitment. Uncertainty about renewal should not emerge only after new equipment has already been ordered.

Also address the financial terms of renewal: whether a renewal fee will be charged, whether the basis for calculating fees will change, and whether the franchisee must accept a new version of the agreement. Do not promise that existing terms will remain unchanged if the intention is to renegotiate them. Equally, an open-ended reference to terms to be decided later does not, on its own, give the franchisee a clear basis for long-term planning.

4. Check the legal limits in Finland

Finland has no dedicated franchise legislation, no specific requirement to register franchise agreements and no statutory franchise disclosure document. Nor is there a general statutory minimum term specifically for franchise agreements. This does not mean, however, that contractual terms can be drafted without legal constraints.

General principles of contract law and the Finnish Contracts Act apply. Under the Act, an unreasonable contractual term may be adjusted or set aside. The Unfair Business Practices Act restricts, among other things, the use of misleading statements when recruiting franchisees. Do not therefore present renewal as guaranteed if the agreement makes it subject to a separate decision.

The Finnish Competition Act and applicable EU competition rules must be considered, particularly where the agreement’s duration is linked to non-compete clauses or exclusive purchasing obligations. A long agreement term and the permitted duration of a non-compete obligation are separate questions. Have these restrictions reviewed separately by a lawyer experienced in franchise agreements.

The Finnish Franchising Association’s Code of Ethics is self-regulation, not legislation. A key principle is that the agreement term should be long enough for franchisees to recoup their initial investments. Assess the Code’s relevance in light of association membership and your own contractual commitments as well.

Practical summary: before signing your first franchise agreement, create a single timeline covering investments, the agreement term and the renewal decision. If they do not align, revise the structure before recruiting franchisees. A predictable planning horizon helps build a sustainable franchise network.