Buying a franchise: scrutinise the initial fee before paying

The initial franchise fee is often your first substantial payment when buying a franchise. But the amount alone does not tell you what you will actually receive or how much risk you are taking before the business opens. Franchising brings together independent business owners, and their financial relationship needs clear boundaries. Treat the initial fee as a purchase in its own right: what is included, when must it be delivered, and what happens if the business never gets off the ground?

1. Turn the fee into a list of specific deliverables

Wording such as “access to the franchise concept” is too vague to explain the payment on its own. Ask the franchisor to specify what the fee covers and to distinguish between the right to join the network and specific services to be provided before opening.

Draw up a simple table with four columns: item, responsible party, delivery date and any separate cost. Depending on the franchise, you may need to ask about:

• access to franchise materials and administrative systems,
• planning the launch and adapting start-up materials,
• initial training for you and your staff,
• installation, induction or other start-up services,
• equipment, stock and travel that are not included.

The aim is not to assume that all these items should be included. It is to prevent something you initially understood to be covered from appearing later as an extra invoice.

Also check whether the fee relates to a particular outlet, an individual business owner or a company. If you later open another outlet, a further fee may be payable, depending on the agreement. Ask for a clear answer while you are still comparing offers.

2. Map out when the obligation to pay arises

Distinguish between the point at which you become liable to pay and the invoice due date. Under the terms, that obligation may arise as soon as you sign, even if the invoice arrives later and opening is still a long way off.

Ask for a timeline from the first signature to the planned launch. Mark each payment, the agreement it relates to and what the franchisor must have done by that point. Include any reservation fees or advance payments: are they deducted from the initial franchise fee, or charged on top?

Specifically ask whether amounts include or exclude VAT and how invoicing will be handled. Have your accountant check the treatment in your business. Do not assume that the fee receives the same accounting or tax treatment as every other start-up expense.

If the whole fee is payable early on, you could propose instalments linked to clearly defined deliverables. This is a negotiating proposal, not a statutory right. Such an arrangement needs to specify what counts as delivered and how any shortcomings will be addressed.

Finally, check that the payment recipient is the correct contracting party. If another company in the group issues the invoice, it must be clear who is responsible for delivery and any refund.

3. Agree what happens if the business does not open

The most important question is simple: what happens to the money if the business never opens? Do not settle for an assurance that the parties will “sort it out then”.

Test the terms against several possible scenarios:

• You cannot secure the funding needed to set up the business.
• Necessary permits or other approvals are not granted.
• The franchisor cannot provide something agreed as essential to the launch.
• The launch is delayed for so long that your plan is no longer viable.
• You decide not to proceed after some work has already been carried out.

The outcome need not be the same in every situation. Ask for written terms stating when a refund is due, what deductions may be made and when the money must be repaid. If the franchisor is entitled to retain payment for work already completed, the calculation should be understandable and verifiable.

A term stating that the fee is never refundable deserves particularly close scrutiny. Ask whether it is also intended to apply if the franchisor fails to meet its own obligations. Have a lawyer assess both the wording and its legal implications before you accept it.

4. Use Sweden’s disclosure law — but put safeguards in the agreement

Sweden has a specific law: Act (2006:484) on Franchisors’ Disclosure Obligations. The franchisor must provide clear, understandable written information well before the franchise agreement is concluded. This must include the fees you will pay and the other financial terms. The initial franchise fee and its terms should therefore form part of the information you receive before signing.

However, the Act does not set prices or provide a general guarantee of a refund. The agreement’s terms and general principles of contract law, including the Swedish Contracts Act, affect the parties’ rights and obligations. Nor should you assume that consumer cooling-off rights apply when you enter into an agreement for your business.

Compare the disclosure documents, the franchise agreement and any separate start-up agreements. If they describe the fee differently, those inconsistencies need to be resolved in writing. Make sure any agreed clarifications become part of the agreement, rather than remaining verbal assurances made during the sales process.

Practical takeaway: Pay only once you can explain what the fee buys, when the obligation to pay arises and what happens to the money if the business does not open. Unclear answers are a reason to seek better terms before signing.