Buying a Franchise: Cap Mandatory Refurbishment Costs in the Contract

The initial package price may not cover your total investment over the life of an outlet. Design updates, equipment replacement or a new point-of-sale system can all bring additional costs. Brand consistency matters in franchising, but prospective franchisees need to know who pays for these changes. Before buying, check how the contract handles mandatory refurbishments so that your decision is not based solely on opening costs.

1. Identify obligations hidden within brand standards

Refurbishment obligations do not always appear in a clause headed “refurbishment”. They may be tucked into requirements to follow the latest standards, maintain the brand image, update technology or comply with an operations manual that the franchisor can amend.

Ask for the draft agreement, together with its appendices and any manuals it refers to. Look for phrases such as “at any time”, “at the franchisee’s expense” and “in accordance with the franchisor’s policy”. These phrases are not necessarily problematic, but their financial implications must be explained.

Divide expenditure into three categories:

• Routine maintenance: minor repainting, repairs and replacement of worn components.
• Scheduled upgrades: replacement of interiors or equipment after a specified period of use.
• Concept changes: a new outlet design, kitchen alterations or new technology across the network.

This distinction helps prevent major concept changes from being treated as ordinary maintenance. Also ask whether newly opened outlets receive a grace period before they must adopt the next design.

2. Understand the legal framework and the limits of automatic protection

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This framework covers matters including franchise criteria, the franchise offering prospectus, franchise agreements and the Franchise Registration Certificate, known locally as the STPW.

The regulation requires franchisors to provide prospective franchisees with an offering prospectus at least 14 calendar days before the agreement is signed. Use this review period to request written explanations of further investment obligations, rather than simply checking the initial package price.

However, the existence of a prospectus and an STPW does not mean that all refurbishment costs are capped or that the government guarantees the investment’s viability. Do not assume there is an automatic monetary limit on refurbishment costs that applies to every brand. Protections covering cost caps, upgrade schedules and the allocation of costs need to be clearly set out in the agreement documents.

The agreement is also subject to the general provisions of contract law in the Indonesian Civil Code. Article 1338 establishes the binding force of lawfully concluded agreements and the requirement to perform them in good faith. You should therefore not rely on a verbal promise that “refurbishment will definitely be minor” if the contract grants broad powers to require changes. Ask a legal adviser to check that all the documents are consistent before signing.

3. Calculate the full cost of changes, not just the building work

Ask for a history of the brand’s previous concept updates. Where available, review examples of refurbishment instructions, scopes of work and actual expenditure for outlets of a similar size and format. Other franchisees’ experiences can help you test the franchisor’s explanations, although they do not guarantee that your outlet’s costs will be the same.

Prepare an estimate covering:

• Design, materials, installation and equipment delivery.
• Dismantling and handling of old fixtures and equipment.
• Any approvals or technical adjustments needed for the work.
• Fixed expenses while the outlet is closed or operating at reduced capacity.
• Training in the use of new equipment and systems.
• A contingency allowance for additional work not yet identified.

Keep actual cash outgoings separate from estimated lost profit to avoid double-counting the impact. Model scenarios involving no closure, partial closure and full closure. Check whether the business will still have enough reserves to meet its regular commitments after the refurbishment.

Also ask what happens to the old assets: can they be sold or transferred, or must they be destroyed? Equipment that still works may lose its economic value to the outlet because standards have changed, rather than because it is faulty. Factor that possibility into your purchase decision.

4. Negotiate an approval process before paying

The aim of negotiation is not to reject every update, but to make your obligations predictable. Propose written provisions covering:

• Notice: sufficient time to plan the budget and carry out the work.
• Frequency: a minimum interval between major upgrades, with clear exceptions for urgent needs.
• Cost limits: a spending cap or an approval process where estimates exceed an agreed threshold.
• Price checks: an itemised budget and the opportunity to compare quotes from suppliers that meet the required standards.
• Remaining contract term: special arrangements where refurbishment is required shortly before the agreement expires.
• Objections: a review process where costs or deadlines are unrealistic.

These are proposed contractual protections, not automatic statutory rights. If the franchisor is only willing to offer concessions verbally, ask for them to be recorded in an appendix signed by authorised representatives.

Practical step: before buying, prepare a one-page checklist of upgrade obligations: triggers, timing, who pays, budget limits and the procedure for raising objections. If any of these remains unclear, resolve it before signing the contract and paying the initial fee.