Buying a franchise: check sales requirements before signing

A strong brand can be appealing, but what happens if your sales fall short of the franchisor’s requirements? A franchise network needs shared ambitions, but a contractual sales requirement can have far greater consequences than missing a budget forecast. Before buying a franchise, check exactly what you must achieve, how performance is measured and what rights you have if results are worse than expected.

Distinguish between a budget, a target and a binding obligation

Start by looking for terms such as “minimum turnover”, “performance requirements”, “sales targets” and “activity requirements”. Do not just read the main agreement. Also check the schedules, the business launch plan and any sections of the operations manual referred to in the agreement.

A budget is not necessarily a promise to achieve a particular level of sales. A target, however, can become binding through the wording of the agreement and its connection to other terms. You therefore need to read these terms alongside the provisions on breach of contract and its consequences.

Ask the franchisor to answer the following questions in writing:

• Is the stated level a planning assumption or an obligation?
• Does the requirement apply from opening day or after a start-up period?
• Is performance measured monthly, quarterly or annually?
• Are there separate requirements for different products, services or sales channels?
• Can the requirement change during the term of the agreement, and if so, how?

Be particularly alert if the sales materials describe a figure as an ambition while the agreement treats the same figure as a minimum requirement. Ask for the difference to be explained and for the intended meaning to be written into the agreement. A verbal assurance that “we are usually flexible” does not provide the same clarity.

Establish how performance will be measured

You cannot assess a requirement without a clear measurement method. If the agreement uses turnover as the measure, it needs to specify, for example, how VAT, returns, discounts and cancellations are treated. Also check which point in the transaction counts: ordering, delivery, invoicing or payment.

Online sales need particular attention. If you carry out the work or hand over the goods but the order is recorded centrally, it must be clear whether that sale counts towards your performance. The issue here is how the contractual requirement is measured, not who owns the customer relationship.

Ask for a worked example covering a standard sale, a return and an order received centrally. Have the franchisor show how each transaction affects progress towards the target. This makes it easier to spot whether you are using the same words to mean different things.

Also check who prepares the supporting figures and how you can review them. Negotiate a clear procedure for challenging inaccurate data before it is used as the basis for any sanction. You should be able to reproduce the calculation using available reports, rather than having to accept an unexplained final figure.

Test the requirement against what you can control

The next step is to assess whether the obligation reflects your actual scope to act. You run an independent business, but within the franchise system’s framework. If the franchisor controls the product range, promotional campaigns or central systems, your ability to influence sales may be limited.

Draw up a simple responsibility map. List what you control, what the franchisor controls and what neither of you controls. Then test how the requirement would work in situations such as a delayed opening, supply problems or a prolonged booking system outage.

Do not simply ask whether the franchisor would “take this into account”. Ask for a contractual provision specifying when the measurement period should be extended, the requirement adjusted or a particular impact on sales excluded from the assessment. Such allowances are not automatic; they need to be considered and, where necessary, negotiated.

Also examine whether a turnover requirement could push you into unprofitable decisions. Calculate the cost of the extra staffing, promotions and discounts needed to reach the required level. A requirement that can be met through low-margin sales may still make poor financial sense. Compare target achievement with profit, not just revenue.

Review the consequences and secure a process for putting things right

Trace each performance requirement to the provision setting out the consequences of a shortfall. Does it require an action plan, additional monitoring or a contractual penalty, or give the franchisor the right to terminate the agreement? Check whether a single shortfall is enough to trigger these consequences or whether repeated shortfalls are required.

Negotiate written notice, clear supporting evidence and a reasonable opportunity to remedy the shortfall. Ideally, specify who must do what under an action plan and when performance will be reassessed. Do not assume you always have a right to a remedy period if the agreement contains no such provision.

In Sweden, the Act (2006:484) on Franchisors’ Duty to Provide Information applies. The franchisor must provide clear written information about what the agreement entails in good time before it is signed. The disclosure requirements cover, among other things, financial terms and termination conditions. An onerous sales requirement and its consequences therefore need to be made clear before signing.

However, disclosure does not automatically make a term fair. The Swedish Contracts Act (1915:218) may also be relevant: under Section 36, unreasonable contractual terms may be adjusted or set aside. Do not build your financial assessment around the assumption that a later legal review will protect you. Have a lawyer with franchise experience review the wording before you commit.

Practical takeaway: Do not sign until you can explain the requirement, reproduce the calculation and describe what happens if you fall short. Make sure any agreed exceptions and opportunities to remedy a shortfall are recorded in writing.