Who Pays for Refurbishment and Equipment Upgrades? What to Check Before Joining a Franchise in Japan

When considering a franchise, it is easy to focus on the initial fit-out and equipment while overlooking refurbishment costs once the business is trading. Maintaining a consistent appearance and reliable equipment across a franchise network matters to the brand. However, the additional investment required may not always fit the franchisee’s financial plans. When choosing a brand, establish who decides on future refurbishments and equipment upgrades, who pays, and when the work must be done.

1. Identify refurbishment obligations in the contract and operating rules

Start by asking the franchisor for more than a draft franchise agreement. Request store design standards, equipment lists, operating rules and documents explaining the conditions for renewal. Clauses such as “comply with brand standards” or “install equipment specified by the franchisor” may also provide a basis for requiring further investment.

Distinguish between scheduled refurbishments and ad hoc upgrades. A full refurbishment at contract renewal, replacement of ageing air conditioning, a change of sales management system and the introduction of new signage all have different purposes and costs. If the documents simply state that “maintenance is the franchisee’s responsibility”, ask for the scope to be made explicit.

You can organise your questions to the franchisor as follows:

• Is refurbishment required at fixed intervals, or does it depend on the condition of the premises?
• Can the franchisor require new equipment to be installed during the contract term?
• How many months before the work begins will specifications and estimates be provided?
• Is the franchisee’s consent or consultation required? Are postponements or alternative equipment permitted?
• What are the contractual consequences if the franchisee cannot comply?

Pay particular attention to arrangements that allow investment obligations to expand simply through changes to the operating rules. Review what can be changed, how notice is given, when changes take effect and how costs are determined. A representative saying “we do not normally ask for this” is not the same as a contract that prevents the franchisor from requiring it at any time.

When comparing brands, assess not just the initial investment but also how predictable these additional investment requirements are.

2. Estimate the full burden, not just the building work

The total cost of refurbishment extends beyond fit-out work and equipment purchases. Check design fees, delivery, removal and disposal of existing equipment, increases in electrical capacity, telecommunications work, post-installation configuration and staff training. Separate what is included in the quotation from what will be charged additionally.

Calculate the impact of any temporary closure separately. Identify rent, lease payments, insurance premiums and other costs that continue while the business is closed, and consider staffing arrangements and how wages will be handled during that period. If you remain open during the work, allow for the effect of reduced opening hours or seating capacity.

Keep these three categories distinct in your financial plan:

• Investment expenditure: Payments for building work, equipment purchases, design, removal and similar items.
• Impact on trading: Reduced sales during the work and fixed costs that continue to fall due.
• Financing costs: Loan interest, guarantee fees, lease-related payments and similar charges.

Ask the franchisor for examples of refurbishments at outlets with a similar size and building conditions to your proposed premises. Comparisons are easier if you know when the work took place, its scope, the number of days the outlet closed, any support from the franchisor and the franchisee’s actual outlay. Historical costs are not quotations for future work, so allow for differences in construction prices and premises.

If you must use approved contractors, check whether you can obtain competing quotations, how specifications can be changed and how additional work is approved. Even where financial support is available, do not treat it as guaranteed income until the conditions for payment and any repayment requirements are confirmed in writing.

3. Align the franchise term, premises lease and financing timetable

If equipment upgrades fall close to the end of the franchise agreement, you may have little time to recover your investment. Even if you are told that “refurbishing will allow you to renew”, check whether renewal remains subject to a separate assessment. The link between refurbishment obligations and contract renewal needs to be clear in writing.

Place the franchise agreement, premises lease, loans and equipment leases on a single timeline. For example, if your repayment schedule extends beyond the remaining franchise term, you must allow for repayments continuing even if renewal is refused. The term of the premises lease and the landlord’s consent to the work also affect whether the project can proceed.

Check who owns the equipment and who is responsible for maintenance. Replacement procedures differ depending on whether the owner is the franchisor, the franchisee or a leasing company. If equipment is replaced before its existing lease expires, outstanding obligations or termination payments for the old equipment may overlap with payments for the new equipment.

Consider a combination of cash reserves, funds set aside from day-to-day profits and borrowing. However, an introduction to a financial institution by the franchisor does not guarantee loan approval. Depreciation for tax purposes is also separate from the timing of actual payments and loan repayments. Your cash-flow forecast should record when money actually moves.

Before joining, discuss a plan that includes future equipment upgrades with a financial institution, and ask a Japanese tax accountant how expenditure should be treated as repairs or capitalised as an asset. This helps avoid a decision based solely on the funds needed to open.

4. Understand the legal framework and record what is agreed

Japan has no single comprehensive law governing all franchise agreements uniformly. However, Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors whose operations qualify as a “specified chain business” under the Act to provide prospective franchisees with written disclosure and an explanation before a contract is signed. This mainly covers retail and food-service arrangements meeting certain requirements; the same statutory disclosure duties do not apply to every franchise agreement.

Where refurbishment requirements have been explained, check that the disclosure documents, contract and operating rules are consistent. Even if statutory disclosure requirements do not apply, it is important to request a written explanation of future investment obligations.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act are also relevant, and not only to retail and food-service businesses. Franchisees are independent businesses, and their dealings with franchisors are subject to the Antimonopoly Act. If a franchisor uses a superior bargaining position to impose disadvantages that are unjust in light of normal business practices, this may raise concerns such as abuse of a superior bargaining position.

That does not mean a refurbishment requirement or an obligation to install specified equipment is automatically unlawful. Each case needs to be considered in light of the need to maintain the brand, the nature of the requirement, the burden imposed, prior agreements and the history of consultation. General legislation, including the Civil Code, is also relevant to contractual obligations and damages.

Before signing, negotiate provisions such as prior consultation for investment above a specified amount, a reasonable preparation period and conditions for postponement. Record any agreement in the contract or a memorandum. Do not assume these are statutory rights that apply automatically. If you have concerns about the enforceability of a clause or the reasonableness of the burden, consult a lawyer experienced in franchise agreements.

Practical takeaway: Before signing, prepare a one-page summary covering the circumstances in which refurbishment can be required, the total financial burden, how you will fund it and what happens if you cannot proceed. If any gaps remain, obtain written answers from the franchisor before deciding whether to join.