Buying a franchise: check future investment requirements

Your start-up budget does not always show what it will cost to be a franchisee over time. After you open, the chain may require new fixtures and fittings, different equipment or a new digital system. A franchise network needs to develop collectively, but responsibility for the costs must be clear. Before buying a franchise, you should therefore check what future investments the franchisor can require and how those decisions can be made.

1. Find the right to make changes across all contract documents

Start by asking for the franchise agreement and any schedules, operating manuals and technical requirements it refers to. An obligation to invest may appear in several documents. For example, the agreement may require your premises to comply with the chain’s current concept at all times, while the manual sets out which fixtures, fittings and equipment are acceptable.

Pay particular attention to wording such as “in force from time to time”, “as directed by the franchisor” and “at the franchisee’s expense”. These terms may mean that your financial obligations can change without you signing a new agreement. The actual scope of the right to make changes must be assessed in light of the agreement as a whole and the circumstances.

Create a simple summary with four columns:

• The requirement: what might need to be replaced, refurbished or introduced?
• Decision-making authority: who decides the scope and timing?
• Responsibility for payment: who pays for installation, running costs and associated costs?
• Limits: are there notice periods, cost caps or exemptions?

Also check which document takes precedence if the manual and the agreement conflict. Ask for the version you review to be dated and clearly identified. A verbal assurance that major changes are “always discussed first” is no substitute for a clear contractual provision.

2. Investigate how changes to the concept have been implemented

Ask the franchisor to describe previous major updates to the concept. The aim is not to predict the next change precisely, but to understand how the franchise network shares risks and costs as the concept develops.

Request specific examples of premises refurbishments, signage replacements, till systems and other mandatory equipment. Ask how much notice franchisees received, how the costs were calculated and whether implementation cost more than planned. Also ask about any approved or planned updates that could affect your outlet after the purchase.

Then speak to several existing franchisees, ideally those who opened in different years and operate from different types of premises. Ask everyone the same questions:

• What mandatory investments have you made since opening?
• Could you influence the timetable or choose an equivalent solution?
• Did the business have to close while the work was carried out?
• Who paid for training, installation and removal of old equipment?
• What happened to equipment that was still working?

Distinguish between documented terms and discretionary concessions. The fact that another franchisee was allowed to defer an investment does not mean you have the same right. If the option to defer is important to your finances, it needs to be included in your agreement.

3. Calculate the full cost of the investment and secure funding

The purchase price is only part of the cost. A refurbishment may also involve design and planning, any necessary permits, installation, temporary storage and lost contribution margin during closure. A system change may require data migration, training and overlapping subscriptions during a transition period.

Ask your accountant to help you distinguish between the investment’s impact on profit and its impact on cash flow. An outlay may affect cash immediately even if the asset is depreciated over several years. Also check when VAT must be paid and when it can be reclaimed, to the extent that you are entitled to recover it.

Prepare a separate scenario in which a mandatory update arrives sooner than you would like. Use quotations where possible and label other figures as your own assumptions. Test whether the business can cover both the investment and its regular payments without relying on uncertain sales growth.

Discuss funding with your bank before committing. Do not assume that a future loan will be approved. If equipment is to be leased, you need to understand what happens if the chain requires a new system before the lease ends. Also compare the investment’s payback period with the contract term you have actually secured, rather than an extension you hope to obtain.

4. Negotiate clear protections before signing

Sweden has a specific Act (2006:484) on Franchisors’ Duty to Provide Information, but no comprehensive franchise law governing all the parties’ rights. The Act requires the franchisor to provide clear, understandable written information well before the agreement is entered into. This must cover, among other things, financial terms and the conditions for amending the franchise agreement. You should therefore ask for a specific explanation of your investment obligations, rather than simply a reference to the manual.

However, this duty to provide information does not create an automatic cost cap or a right to reject every update. The terms of the agreement and general contract law, including the Swedish Contracts Act, are central. Have a lawyer assess broadly worded variation clauses before you accept them.

For example, negotiate advance written notice, a clear decision-making process and a cap on the cost of mandatory updates over a defined period. Other possible protections include phased implementation, exemptions for recently purchased equipment and specific cost-sharing arrangements for major investments towards the end of the contract term. Also distinguish between changes needed to comply with the law and purely commercial changes to the concept.

Practical takeaway: Do not sign until you can explain who can require the next investment, how the cost is limited and how the business will pay for it. Future development should be an understandable part of the deal, not an unknown financial obligation.