Buying a franchise: assessing the initial contract term

When buying a franchise in Portugal, knowing the entry costs is not enough: you also need to understand how long you will be able to run the business on the agreed terms. In this market, the initial contract term should be assessed as a key financial consideration. A concept that suits your profile may become a difficult proposition if the time available is not compatible with the investment required.

1. Establish when the term starts and ends

The first question is simple: does the term run from signing or from opening to the public? These dates may be some time apart, and that gap affects your actual operating period.

Ask for the contract to identify clearly the event that starts the clock and how it will be evidenced. If it refers only to the contract ‘taking effect’, confirm what that means. It may not coincide with the point at which the outlet starts generating revenue.

Draw up a short timeline covering:

• Expected signing and effective dates;
• Time needed to prepare the outlet;
• Expected opening date;
• End date of the initial contract term;
• Actual number of months available to operate the business.

Also check for any temporary permissions or trial phases. Ask whether these periods are included in the advertised term and what payments are due during each phase. The aim is to establish the operating period secured by the contract, not simply the number of years quoted in the sales pitch.

2. Compare the term with the investment payback period

Assess the initial term against the money you will need to commit to opening and running the outlet. Add up the initial franchise fee, fit-out works, equipment, set-up expenses and working capital requirements, taking care not to count any item twice.

Then ask your accountant to help distinguish between three concepts: accounting profit, available cash and investment recovery. Making a profit does not mean you have recovered the capital invested. An outlet can report a profit while still needing cash to repay debt, replace equipment or meet day-to-day cash requirements.

Use cash flows that are consistent with the purpose of your analysis: if you want to assess the return of your own invested capital, also factor in borrowing and the associated repayments. Include realistic remuneration for your work, so that you do not confuse recovering your investment with years of unpaid management.

The decisive question is this: under a cautious scenario, can you recover your investment within the initial term, with some room for unexpected setbacks? There is no universally suitable contract length. The answer depends on costs, cash-generating capacity and the outlet’s specific obligations.

3. Do not treat a possible continuation as guaranteed time

When assessing the initial term, first run the figures without assuming that you will remain with the brand after it expires. A commercial expectation of a long-term relationship is not the same as a contractual right to operate for that period.

This exercise does not require you to discuss every renewal condition at the outset. Its purpose is to establish whether your decision to buy depends on years that have not yet been secured.

Also compare the franchise term with the commitments you intend to make to third parties. A loan or equipment hire agreement may still require payments after you no longer have permission to operate the franchise business. Identify these mismatches before entering into agreements.

If viability depends on selling equipment at the end of the term, use a cautious, justifiable valuation. Do not assume that the franchisor will buy it back or that you will recover any value from fit-out works. Assess any buyback commitment on its specific terms, rather than simply relying on its existence.

4. Understand the legal framework and negotiate before signing

Portugal has no specific law governing franchise agreements, no dedicated register of franchisors and no pre-contractual disclosure document with legally prescribed content. Nor is there a general minimum term specifically imposed on franchise agreements.

The general rules of the Portuguese Civil Code apply, including freedom of contract and good faith during negotiations and performance of the agreement. Where standard contract terms are used, Decree-Law No. 446/85, as amended, is also relevant, particularly regarding the communication and explanation of those terms. Other rules may apply depending on the business activity and the content of the agreement.

The absence of specific legislation does not mean that everything written in the contract is necessarily valid. Ask a lawyer to review how the term is calculated and any provisions that could shorten the operating period. If the term does not support the investment, propose a different duration or revisit the capital required before making commitments.

Practical conclusion: count the actual months available to operate, test whether you can recover your investment within that period, and do not base your purchase on years of trading that the contract does not yet guarantee.