Buying a franchise: check the master franchisee’s position

When buying a franchise in Slovenia, you may be negotiating with a local master franchisee rather than directly with the franchisor. This arrangement can make working together easier, but it adds a contractual layer on which your business also depends. Before joining the franchise network, establish what will happen to your outlet if the agreement between the local partner and the franchisor ends.

1. Clarify who is actually granting you the franchise

A master franchisee generally acquires the right to develop a franchise network in a particular territory and, subject to agreed conditions, enter into agreements with local franchisees. The precise scope of those rights is determined by its agreement with the franchisor. Being described as a ‘master partner’ in a presentation does not, in itself, establish what the provider is entitled to promise you.

Start by drawing up a simple overview of the three levels: the franchisor, the local master franchisee and your company. For each level, identify the legal entity and its obligations. In particular, note who receives the initial payment, who provides support and who can make decisions affecting the continuation of your business.

Ask the local provider to answer the following questions:

• Are you entering into an agreement with them in their own name, or are they acting solely as an agent for another company?
• Do they have the right to grant sub-franchises in Slovenia and for your proposed outlet format?
• Does your agreement require additional approval from the franchisor?
• Is the franchisor making any commitments directly to you?

The backing of an international brand is not the same as a direct contractual commitment from its franchisor. If such a commitment is promised, make sure it is clear who is making it and in which document.

2. Check the term and conditions of the underlying agreement

Your agreement may provide for several years of trading, while the master franchise agreement expires sooner. That alone does not establish the consequences for you, but it is a reason to investigate further. Do not rely solely on assurances that renewal is ‘just a routine formality’.

Ask for evidence that the master franchise agreement is in force, confirmation of its term and proof of the right to enter into sub-franchise agreements. It is also worth obtaining details of the renewal conditions and asking whether any notice of termination, breach warning or dispute already exists that could jeopardise the local arrangement.

The full master franchise agreement may contain confidential commercial information. You could suggest having a lawyer review the relevant sections, obtaining appropriately redacted extracts or requesting direct written confirmation from the franchisor. What matters is that the evidence answers your question, rather than merely confirming that the two companies have a business relationship.

Also clarify how the local partner’s development obligations affect your position. If the master franchisee must open a certain number of outlets, ask whether failing to meet that obligation could result in the loss of its rights. Your outlet’s success does not guarantee that the local partner is meeting all its obligations to the franchisor.

3. Agree how your business can continue if the master agreement ends

The key question is not simply whether the master franchise agreement is in force today, but what happens if it ends tomorrow. Your review should cover expiry, termination for breach and the local partner’s insolvency. Ask for an explanation of the consequences for your agreement in each case.

Possible contractual arrangements include continuing directly with the franchisor or transferring to a new local partner. Neither option should remain merely a verbal promise. If the franchisor is to take on an obligation, an assurance from the master franchisee alone is not enough; an appropriately binding consent or agreement is required.

For any proposed transfer, check:

• whether you retain the remaining term of your agreement and the agreed financial terms;
• whether you would have to pay another initial franchise fee;
• who provides essential services and support during the transition;
• how payments already made for services not yet delivered will be handled;
• who will notify you of the change and within what timeframe.

A useful practical test is to ask: ‘Who would I pay the next invoice to, and who would I call for help if the local partner ceased operating?’ If the answer is unclear, the arrangements for continuing your business are not yet sufficiently defined.

4. Take account of Slovenia’s legal framework

Slovenia has no dedicated franchising law, compulsory franchise register or specific statutory franchise disclosure document that must be provided before a contract is signed. A franchise agreement is an innominate contract — one not specifically defined as a distinct contract type in legislation — governed by the general rules of the Slovenian Code of Obligations (Obligacijski zakonik, OZ), including the principle of good faith and fair dealing and the rules on contractual obligations.

This does not give you an automatic right to be taken on by the franchisor when the master franchise agreement ends. Ask a lawyer to review the related documents for the effects of termination or expiry, the conditions for any transfer of your agreement and the consents required. Where the franchisor is based abroad, the law governing each contractual relationship must also be considered. If the Slovenian partner becomes insolvent, the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (ZFPPIPP) is also relevant; contractual promises cannot then be assessed separately from the rules governing those proceedings.

Practical takeaway: before signing, obtain evidence of the master franchisee’s position and written provisions setting out what happens if its agreement ends. Your ability to keep trading should not depend solely on the local provider’s promise.