Buying a franchise: check your right to set prices

A well-known brand can attract customers, but your business must cover wages, rent and other costs. Before buying a franchise, you therefore need to understand who actually sets selling prices. Joint promotions can be valuable within a franchise network, but the arrangement must allow for lawful pricing and a financially viable local business.

1. Distinguish between recommended and binding prices

Start by asking the franchisor to explain the pricing model in writing. Are there recommended prices, maximum permitted prices or requirements to follow a central price list? The wording matters, but so does the way the rules are applied day to day.

A recommendation is not genuinely voluntary if departures from it lead to pressure or adverse consequences. Ask what happens if you want to sell an item below the recommended price. Also check whether discounts, bonuses or other support depend on your following the price list.

Ask for clear answers to the following:

• Can you reduce a recommended price without approval?
• Can you raise the price if there is no legally permissible price cap?
• Can you set your own local discounts and bundle prices?
• Who sets prices for centrally organised promotions?
• Are there any written or informal consequences for departing from the pricing policy?

Distinguish between different sales arrangements too. For orders placed through a central website, you need to know which company the customer is buying from, who receives payment and what payment your outlet receives. Do not assume that the same pricing model applies across all channels.

2. Understand the applicable Swedish rules

Sweden has a specific Act on the Duty of Franchisors to Provide Information (2006:484), but no comprehensive franchise law governing the entire relationship. Under this disclosure legislation, the franchisor must provide clear, understandable written information well before the agreement is signed, explaining its implications and any other matters that need to be disclosed in the circumstances. This information must cover, among other things, fees and other financial terms.

You should therefore ask for pricing controls, promotional requirements and related financial obligations to be explained before you sign. However, disclosing a term does not automatically make it lawful.

The Swedish Competition Act (2008:579) is central to pricing. EU competition rules may also apply, including where trade between member states may be affected. Binding fixed or minimum resale prices are generally prohibited. Indirect controls, such as pressure to maintain a particular minimum price, can also be problematic.

Recommended prices and maximum prices may be permitted, but pressure or incentives must not turn them into fixed or minimum prices in practice. The assessment depends on the arrangement and the circumstances. Joint promotions do not provide a general exemption from competition rules.

The Swedish Contracts Act also applies to the contractual relationship. Have any questionable pricing terms reviewed by a lawyer with expertise in franchising and competition law. Do not assume that a term is acceptable simply because it is used throughout the franchise network.

3. Check how pricing freedom works in practice

Do not read only the main agreement. Pricing rules may appear in the operations manual, promotional terms, schedules or instructions for the till system. Ask to see the documents referred to in the agreement and check who is entitled to amend them.

Then ask for a demonstration of the till and ordering systems. Can you change prices yourself? Do you need centrally granted access rights? Are your local prices overwritten when a new promotion goes live? An agreement referring to recommendations is of little help if the technology effectively locks in the selling price.

Speak privately with existing franchisees as well. Ask how they implemented their most recent price change, rather than simply whether they feel they have freedom over pricing. Specific examples make it easier to identify differences between the contractual terms and everyday practice.

Document any inconsistencies. If the franchisor says participation in promotions is voluntary but the manual says it is compulsory, this needs to be resolved in writing before you buy. Also ask for a clear order of precedence establishing which document takes priority if the information conflicts.

4. Calculate the impact of promotions before accepting the terms

A promotion can increase sales without improving profitability. Prepare a separate calculation for a few representative products or services at promotional prices.

Start with the selling price excluding VAT and deduct the cost of goods, payment processing costs, variable franchise fees and any other costs triggered by the sale. For services, you also need to factor in the working time involved. Check whether additional staffing, deliveries or wastage affect the result.

Pay particular attention to the amount on which percentage-based fees are calculated and how the cost of discounts is shared. If the franchisor promises a contribution towards promotions, the terms should specify the amount or calculation method, the conditions for receiving it and when it will be paid.

Finally, ask for written clarification of your authority to set prices, participation in promotions and system access rights. Negotiate unclear terms before you commit, not when the first promotion has already been advertised.

Practical takeaway: Compare the agreement, the systems and franchisees’ experiences. Only buy once you understand who sets prices, how discounts are funded and whether each sale contributes towards covering your costs.