Franchise agreements: choosing an appropriate term

Turning an existing business into a franchise network means deciding how long both parties will commit to the relationship. This decision should not simply copy another brand’s approach. An appropriate term reflects the franchisee’s investment, the operating timetable and the obligations your business can realistically fulfil. Here is how to prepare for that decision before having the agreement drafted.

1. Distinguish legal requirements from commercial decisions

In France, there is no single statutory term for all franchise agreements. The term is negotiated between the parties, subject to general contract law and competition law. A term used by another brand is therefore neither a requirement nor proof that it suits your concept.

Pre-contractual disclosure is, however, regulated. Article L. 330-3 of the French Commercial Code, introduced by the law of 31 December 1989 known as the Doubin Law, applies when a business makes a trade name, trade mark or trading identity available while requiring an exclusive or near-exclusive commitment for the activity concerned.

In these circumstances, the pre-contractual disclosure document, known in France as the DIP, and the draft agreement must be provided at least twenty days before the agreement is signed or, where applicable, before any advance payment is made. Article R. 330-1 specifies the information required, including the agreement’s term and the conditions governing renewal, termination and transfer.

The term must therefore be settled and explained before any commitment is made, rather than treated as a detail to be filled in once agreement has been reached. Also have any associated exclusivity or non-compete obligations reviewed: a valid contract term does not automatically make those obligations valid.

2. Start with the investment actually required

List the expenditure essential to replicating your concept: fit-out, equipment, software, signage, training and launch costs. Distinguish equipment that can be resold from expenditure specific to your brand, which is harder to recover if the business stops trading.

For each item, document:

• the estimated cost and the source of the estimate;
• its expected useful life;
• any likely replacements during the agreement;
• whether it can be reused outside your network;
• the proposed method of financing.

Draw on invoices and experience from your existing business, then identify what will differ when an independent franchisee opens a new outlet. Premises that are already fitted out, or equipment that has been fully paid for, can obscure a new franchisee’s actual funding needs.

Do not confuse the accounting depreciation or amortisation period, the loan term and the investment payback period. These measures answer different questions. Comparing them with your accountant can help assess whether the agreement makes commercial sense, without guaranteeing future profitability.

Finally, test several start-up scenarios. If the project’s viability consistently depends on a renewal that is not yet assured, reconsider the level of investment, the operating format or the proposed term.

3. Define precisely when the term begins

A term expressed in years remains ambiguous until its starting point is defined. Signing, the agreement taking effect and opening to the public may all happen on different dates.

Suppose building work delays the opening. If the term runs from signing, part of the contractual period will have elapsed before the first sales are made. If it starts on opening, the preparatory period must still be governed by clear provisions so that it does not continue indefinitely.

Work with your legal adviser to prepare a timetable specifying:

• when each party’s obligations take effect;
• the event that triggers the start of the term;
• the deadline for opening and how delays will be handled;
• when billing begins for the various services;
• the consequences if conditions set out in the agreement are not met.

Also check how the agreement fits with the commercial lease, financing arrangements and your rights to the trade mark. These commitments will not necessarily expire on the same date. Make any differences explicit rather than assuming they will all end together.

4. Check your ability to fulfil your obligations throughout the term

A long term also commits the franchisor. Your business must be able to provide the promised services throughout the relationship: access to know-how, support and the right to use the brand’s distinctive identifiers, as specified in the agreement.

Assess the staffing, technical and financial resources needed over the proposed period. In particular, examine any reliance on an IT provider, a trade mark licence or a key individual. A contractual promise should not depend solely on your current availability as the business owner.

Then record the reasons for your choice in an internal note: investment, the start-up period, related commitments and your capacity to provide support. Check that the DIP, the agreement and your sales presentations are consistent. Never present renewal as guaranteed unless it is legally assured.

Key takeaway: before setting a term, compare three timelines: investment, trading operations and your own commitments. Have any differences reviewed before offering the agreement to your first franchisees.