The initial franchise agreement term: aligning it with the investment

When expanding an existing business in Slovenia into a franchise network, do not set the initial agreement term simply by copying another brand. The term should sensibly align the franchisee’s initial investment, use of the premises and your obligations. Too short a term may make the investment difficult to justify, while too long a term ties both parties to assumptions that have not yet been sufficiently tested. The question is therefore not just ‘how many years?’ but ‘why that many?’.

1. Separate the agreement term from any promise of recouping the investment

Slovenia has no specific franchising legislation, and its Obligations Code does not regulate franchise agreements as a distinct type of contract. General rules under the Obligations Code apply to the agreed term, including the principle of good faith and fair dealing and limits on freedom of contract. The parties cannot contract out of mandatory legal provisions and must also comply with competition law.

There is no specific statutory requirement for franchise agreements to have a uniform term. This does not mean that every term is suitable for every business model. Before signing, have a lawyer check obligations whose permissibility may depend on their duration, particularly restrictions on competition.

Nor is there a specific statutory list of information that a franchisor must disclose before signing. Nevertheless, clearly explain to prospective franchisees the assumptions supporting the proposed term. An agreement lasting a specified number of years does not, in itself, guarantee that the investment will be recouped.

In presentations, therefore, distinguish between the contractual right to operate and a financial projection. Explaining that the chosen term provides a basis for business planning is not the same as assuring a prospective franchisee that they will achieve a particular return within that time.

2. Map out the investment timeline

Before choosing an expiry date, compile the expenditure the franchisee must incur to join the network. Do not limit this to the initial franchise fee. Include fitting out the premises, equipment, initial training, stock and other necessary expenditure. For each item, distinguish between when payment is due and the period during which the asset will actually be useful.

Prepare an overview with four columns:

• Obligation or asset: what the prospective franchisee is buying or committing to.
• Start of use: when it begins contributing to the business.
• Expected useful life: how long it can reasonably be used.
• Position at expiry: whether the franchisee can sell it, use it elsewhere or must remove it.

Flag investments tied exclusively to your brand. Unbranded equipment may be usable elsewhere, whereas a bespoke fit-out is much harder to repurpose. Do not treat any residual value as guaranteed income unless you have a reasonable basis for doing so.

Accounting depreciation is not the same as recovering the money invested. Ask an accountant to help distinguish between costs, cash outlays and the residual value of assets. To decide on the term, you need a cash-flow timeline, not simply the date when the equipment will be fully depreciated for accounting purposes.

If you use results from a company-owned outlet, explain the point from which you are measuring its performance. An established outlet does not necessarily indicate how long a new one will need to build a customer base.

3. Align the agreement’s start date, the lease and the opening

The signing date, the start of preparatory obligations and the start of normal trading are not necessarily the same day. The agreement should clearly specify which event triggers the agreed term and how that event is evidenced. Avoid vague expressions such as ‘from the start of the relationship’.

If the term runs from signing, the prospective franchisee will spend some of the available time preparing the outlet. If it runs from opening, you must also clearly define the intervening period. The aim is not to choose one approach automatically, but to prevent the parties from interpreting the same provision differently.

Next, check the related agreements:

• Does the right to use the premises cover the planned period of operation?
• Do equipment hire or financing arrangements extend beyond the franchise agreement?
• Do important software licences expire before the agreement ends?
• Is the option to extend the premises lease secured, or does it depend on a new agreement?

Suppose the premises lease is shorter than the proposed franchise term. The opportunity to negotiate with the landlord is not equivalent to an already agreed right to continue using the premises. Flag this gap before signing and specify who must resolve it. A franchise agreement does not itself extend rights under other contracts.

4. Test whether the term holds up under a more cautious scenario

Before making a final decision, test both a baseline and a more cautious business scenario. In the latter, allow for slower customer acquisition, higher costs or the need to replace equipment. The aim is not to produce a forecast with a misleading degree of precision, but to establish whether the proposed term depends entirely on a favourable outcome.

Pay particular attention to substantial mandatory investments towards the end of the agreement. If franchisees would have to replace most of their equipment shortly before expiry, it must be clear why this is necessary and how the proportionality of the requirement will be assessed. Do not automatically rely on a future renewal to resolve a mismatch that exists today.

Record the final decision in a short internal rationale: the assumptions used, relevant deadlines under related contracts, identified risks and reasons for the chosen term. Share the key findings with the prospective franchisee and give them the opportunity to obtain an independent legal and financial review.

Practical conclusion: set the initial term only once you can see the investment, opening, lease and major future expenditure on a single timeline. If that timeline works only on the assumption of automatic renewal or guaranteed profit, the proposal is not yet ready for signing.