Buying a franchise: choosing the right contract term

A franchise brand may appeal to you without offering a timescale that suits your investment. Before joining a franchise network, check how long you will actually be able to operate the business, when that period starts and which costs you will need to recover. The key question is not simply ‘How many years does the contract last?’ but ‘What can I reasonably finance and recoup during that period?’.

1. Establish how much operating time you will actually have

The term advertised in a sales presentation is not enough. Check the draft contract for its effective date, the event that triggers its commencement and its expiry date. Signing, completing training and opening to the public may all happen at different times.

If the contract starts when you sign, several months spent securing approvals, carrying out building work or recruiting staff could eat into your trading period. During that time, you may already be incurring costs without any corresponding revenue.

Ask for written answers to the following questions:

• Does the contract start on signing or when the business actually opens?
• Is there a deadline for opening?
• Will a delay beyond your control push back the expiry date?
• Who confirms the opening date, and what document records it?
• Do the other contracts essential to running the business follow the same timetable?

If you are buying an existing franchise business, distinguish clearly between taking over the existing contract and signing a new one. The remaining term is not the same as a full term, even if the asking price for the business looks attractive. Have the applicable timetable confirmed before drawing up your financial plan.

2. Compare three different financial timescales

With your accountant, compare the operating period provided for in the contract, your loan repayment schedule and the time needed to recoup your investment. These are three distinct timescales.

Depreciation or amortisation spreads the cost of an asset over its useful life for accounting purposes. Bank loan repayments follow a schedule. Recovering the money you have personally invested, however, depends on the cash the business actually generates after expenses, tax, working capital requirements and your own remuneration.

Prepare a year-by-year table covering:

• investment and costs incurred before opening;
• cash generated by the business;
• realistic remuneration for your work;
• loan repayments;
• foreseeable equipment replacements;
• the outstanding loan principal when the contract expires.

Do not count payment for your day-to-day work as a return of invested capital. Equally, an accounting profit does not mean there is enough cash to meet every repayment as it falls due.

Then test the impact of a delayed opening and a slower build-up in trading. The aim is to assess the safety margin offered by the initial term, without assuming that the contract will be extended or that you can sell the business at a favourable price.

3. Understand what French law guarantees

France has no single statutory term that applies to all franchise contracts. The parties negotiate the term, subject to general contract law and any specific rules governing particular clauses. No standard contract term, on its own, guarantees that a venture will be profitable.

The framework introduced by the Doubin Law, set out in Article L. 330-3 of the French Commercial Code, governs pre-contractual disclosure where its conditions are met: a trade name, trade mark or trading identity is made available in return for an exclusive or near-exclusive commitment in carrying out the business activity. In these circumstances, the pre-contractual disclosure document and draft contract must be supplied at least twenty days before signing or, where applicable, before any advance payment is made.

Article R. 330-1 specifies, among other things, that the information must cover the contract term and the conditions for renewal, termination and transfer. This period gives you time to examine the proposed timetable; it does not create a general right to withdraw after signing.

Be wary, too, of sweeping claims about exclusive purchasing clauses: their limits and their interaction with competition law require a separate assessment. They cannot be used to infer a universal maximum term for all franchise contracts.

4. Negotiate the timetable before committing

If the figures and timescales look difficult to reconcile, present your analysis to the franchisor. You could ask for a different initial term, a start date linked to opening or a clearly defined mechanism for handling delays. Any changes must be agreed and put in writing: a verbal promise does not secure your timetable.

A longer term is not always better. It also extends your obligations and may limit your ability to pursue a different venture. Ask a solicitor or lawyer familiar with French franchise law to check that your preferred term is consistent with the commitments you are making.

Key takeaway: before signing, bring together the contractual dates, financing repayment schedule and expected payback period for your own investment on a single page. If the plan only works with an extension that has not been secured, revise it before committing.