Franchising: checking minimum takings requirements

Joining a franchise network means sharing a business concept while remaining responsible for your own business. Before choosing a brand in Italy, check whether the contract requires minimum takings: a seemingly minor threshold can affect the viability of your business and the continuation of the franchise relationship. The question is not how much the franchisor expects you to sell, but how much you are contractually required to generate and what happens if you fall short.

1. Distinguish a contractual obligation from a sales forecast

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 3 requires the agreement to be in writing, failing which it is void. It also requires the contract to state expressly, among other things, how royalties are calculated and paid, and any minimum takings the franchisee must achieve.

The word any matters: the law does not impose a minimum takings threshold on every franchisee. Instead, it requires any such threshold to be expressly stated in the contract where one applies.

You need to distinguish between three situations:

• Financial forecast: an estimate of expected results, which does not in itself create an obligation to achieve them.
• Sales target: a goal used to organise or assess the business, whose implications depend on the agreed terms.
• Contractual minimum takings: a threshold to which the contract may attach specific consequences.

Do not rely on the label alone. An appendix called a “target plan” could contain binding commitments, while a projection shown during a meeting might be purely illustrative. Ask your lawyer to review the contract, its appendices and any documents it refers to together.

2. Clarify what is being measured

You can assess a threshold only if its calculation method is clear. “Takings”, “turnover” and “sales” are not automatically interchangeable: they may refer to different measures and different points in time.

Ask for a written definition that clarifies at least:

• whether amounts include or exclude VAT;
• how returns, refunds, cancellations and discounts are treated;
• whether the calculation counts invoiced sales or payments actually received;
• how online orders handled or delivered by the outlet are allocated;
• which period is measured and which documents establish the result.

For a business selling subscription services, for example, a customer may sign up in one period while their instalment payments are received in another. Without a precise definition, the parties could interpret the same business performance differently.

Also check when measurement begins: on signing, when the business actually opens, or at the end of an initial period. An annual threshold should specify how a first financial year of less than twelve months is treated. These are terms to negotiate, not concessions automatically guaranteed by law.

3. Check commercial viability without confusing takings with margins

Achieving the required takings does not necessarily mean making a profit. Frequent promotions, purchasing costs and operating expenses can absorb the margin even when sales meet the threshold.

Work with your accountant to translate the target into practical operating requirements: how many transactions you need, their required average value and how many trading days are available. Compare these figures with the capacity of your premises and staff, without assuming that every hour of opening will generate the same level of business.

Then prepare a cautious scenario allowing for seasonality, the start-up phase and possible interruptions. If the threshold is monthly, a strong annual result may not offset weaker months: that depends on the clause.

Negotiate criteria that reflect how the business actually operates, such as a gradual increase during the initial period, measurement periods suited to seasonal trading, or a review procedure for specified circumstances. Avoid wording that allows the target to be increased without clearly agreed criteria, notice periods or limits.

4. Read the consequences before agreeing

The crucial point is to understand what happens if you fail to achieve the minimum takings. The contract might provide for an operational review, a corrective action plan, financial consequences or measures affecting whether the franchise relationship continues. None of these consequences should be assumed: you need to read the actual terms proposed and have their legal validity checked.

Ask whether a single period below the threshold is enough to trigger consequences, how any shortfall is formally notified and whether there is a deadline for putting matters right. Also check who verifies the data and how you can challenge any errors in the allocation of sales.

Article 4 of Law No. 129/2004 requires a complete copy of the contract and the prescribed appendices to be supplied at least thirty days before signing. Use this time to obtain written clarification of the threshold as well: a sales assurance is no substitute for a clear clause.

In practice: before signing, summarise the minimum amount, calculation method, measurement period, exceptions and consequences on one page. If any of these points remains ambiguous, ask for it to be clarified in the contract.