Franchise Agreement: What to Check Before Buying a Franchise

Ready to buy a franchise? Do it safely. Before paying the initial franchise fee and signing the agreement, it is important to check:

• the franchisor;
• the franchisor’s rights to the trademark;
• the terms of the agreement;
• all payments;
• restrictions and the terms for ending the relationship.

It is especially important to do this before making the main investment. Once the initial fee has been paid, premises leased, renovations completed, and equipment and inventory purchased, it becomes much harder to walk away from an unfavorable franchise without financial losses.

Below, we explain how this review works in practice and what exactly to look for. Use this article as a checklist before entering into a franchise agreement.

Which Agreements Are Used to Structure a Franchise?

Under Ukrainian law, the legal form that corresponds to the classic franchise model is a commercial concession agreement. Under such an agreement, the rights holder grants the user, for a fee, the right to use a set of rights belonging to the rights holder, together with its business reputation and commercial experience. These relationships are governed by Chapter 76 of the Civil Code of Ukraine. A commercial concession agreement must be concluded in writing.

In practice, a franchise may be structured through more than one document. Along with the main agreement, the franchisee may be offered:

• trademark license agreement;
• a supply agreement;
• a services agreement;
• an NDA;
• software use rules;
• a brand book;
• operating standards and other documents.

That is why the entire document package must be reviewed, not just the agreement titled “franchise” or “commercial concession.”

In one of our matters, when reviewing the transaction documents, we found no document specifying exactly what the franchisor had to deliver to the franchisee after payment of the initial franchise fee. The agreement referred to a brand book, operating standards, instructions, and other materials, but did not define a specific list.

We prepared a separate franchise package handover and acceptance certificate that listed the documents, materials, and access credentials the client was to receive. This made the franchisor’s obligations clear and reduced the risk of disputes over whether everything required to launch the business had actually been transferred.

What to Review in a Franchise Agreement

Before analyzing the agreement itself, it is worth checking the franchisor:

• the company’s registration details;
• the authority of the person signing the agreement;
• material litigation and other information that may indicate risks in the relationship.

The franchisor’s trademark rights must also be checked separately. It is important to establish who owns the brand, whether it has legal protection in Ukraine, and whether your counterparty itself has the right to grant the franchisee permission to use it. Information on trademark applications and trademarks registered in Ukraine can be checked through the official information systems of UANIPIO.

This is especially important when buying a foreign franchise or when the agreement is signed not directly with the brand owner, but with a Ukrainian representative or master franchisee.

For more on structuring a foreign franchise specifically, see our separate article: How to Buy a Foreign Franchise in Ukraine: Procedure and Documentation

The agreement itself must clearly define the subject matter of the relationship: which trademark may be used, and which technologies, standards, commercial experience, software, and other elements of the business model are transferred to the franchisee.

The territory and exclusivity must also be checked. If the franchisor promises an exclusive right to operate within a particular district or city, this must be expressly stated in the agreement. It should also be established whether the franchisor may open its own location nearby, sell another franchise, or make online sales into that territory.

Operating standards require separate attention. It is normal for a franchise to impose requirements for the premises, equipment, product range, customer service, and use of the brand. However, you should check whether the franchisor may change those standards unilaterally and whether such changes could create unexpected costs for the franchisee.

It is equally important to define the scope of franchisor support specifically. If training, opening assistance, marketing, consulting, or staff support are promised when the franchise is sold, those obligations should preferably be stated in the agreement rather than remain only part of a sales presentation.

You may also find this useful: Franchising in Ukraine: How Clear Franchise Agreement Terms Affect Business Success

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Which Payments, Restrictions, and Additional Obligations Should Be Checked?

The cost of a franchise is usually not limited to the initial franchise fee. Before signing the agreement, calculate all payments and mandatory expenses that may arise during the relationship.

In particular, check:

• the amount of the initial franchise fee and whether it is refundable;
• royalties and how they are calculated;
• marketing and advertising fees;
• mandatory purchases of goods, raw materials, or equipment;
• fees for software, training, and other services;
• minimum purchase or sales volumes;
• costs of equipment upgrades, renovations, and rebranding.

For example, if the agreement sets royalties as a percentage of turnover, it is necessary to define clearly what “turnover” means and which transactions are included in that calculation.

Mandatory purchases from the franchisor or its designated suppliers also require caution. Check how prices are set, the delivery terms, and whether another supplier may be used if the required products are unavailable.

Another important area is non-compete restrictions. The agreement may restrict the franchisee from working with competitors or operating a similar business. The Civil Code of Ukraine permits certain competitive restrictions in a commercial concession agreement. Particular attention should be paid to restrictions that continue after the franchise ends: their duration, geographic scope, and the types of activities they cover.

Penalties and the parties’ liability should also be checked. The agreement should not create a situation in which the franchisee pays a substantial penalty for every minor breach while the franchisor effectively bears no liability.

You may also find this useful: Pros and Cons of Franchising in Ukraine and How to Draft a Franchise Agreement

Termination Terms and Exiting the Franchise

Check:

• the term of the agreement;
• the renewal procedure;
• grounds for early termination;
• whether the franchisor may terminate the agreement unilaterally.

A particularly important question is: what happens to the business after the agreement ends?

The franchisee should understand when the right to use the brand ends, how quickly signage and the premises must be changed, and what happens to remaining branded inventory, documentation, equipment, and software.

It is also necessary to check whether confidentiality and non-compete obligations continue after termination.

For an indefinite-term commercial concession agreement, the Civil Code of Ukraine establishes a separate procedure for withdrawal from the agreement. At the same time, the specific termination terms largely depend on the wording of the agreement itself.

Key Risks and Common Mistakes When Buying a Franchise

One of the most common mistakes is deciding to buy a franchise primarily on the basis of the franchisor’s presentation and the stated payback period.

Before signing the agreement, review not only the legal documents but also the logic of the financial model:

• projected revenue;
• rent and staff costs;
• cost of goods or services;
• mandatory purchases;
• marketing costs and other fees.

Typical legal risks include:

• the franchisor does not have the necessary rights to the brand;
• the agreement is signed without all required appendices;
• there is no protected territory;
• excessive penalties;
• the franchisor may change operating rules unilaterally;
• unfavorable early termination terms.

When buying a foreign franchise, you should additionally check the governing law, dispute resolution procedure, payment terms for the non-resident, and legal protection of the trademark in Ukraine.

For example, when reviewing a foreign franchise agreement for one of our clients, we identified a clause allowing the franchisor, in practice, to terminate the relationship early and unilaterally at any time, while the franchisee had no equivalent right. The agreement also contained no mechanism for compensating costs the client might already have incurred in launching the business, including the initial franchise fee, premises renovation, equipment purchases, marketing, and other investments.

As a result, the client risked investing a substantial amount in launching the franchise and then losing the right to operate under the brand after termination without any ability to recover those costs. We proposed changes to the early termination procedure, an exhaustive list of termination grounds, a cure period for breaches, and additional protections for the franchisee. This significantly reduced the risk of losing the investment because of a unilateral decision by the franchise owner.

Legal Support for Franchising: How We Can Help

Our company provides legal support for the acquisition of both Ukrainian and foreign franchises.

• We review the franchisor and its trademark rights, analyze the franchise agreement and its appendices, and assess payments, territory, exclusivity, restrictions, penalties, and termination terms.
• Based on the review, we identify legal risks and prepare amendments to the agreement to minimize them. If needed, we can also support negotiations with the franchisor.
• If the agreement has not yet been prepared, we can draft the franchise agreement and the necessary appendices based on the specific business model and the parties’ arrangements.

Reviewing a franchise before purchase helps the franchisee understand not only what they are paying for, but also which rights they receive, which additional obligations they assume, and what will happen to their investment if the relationship ends.

If you are planning to enter into a franchise agreement in Ukraine, contact us so that you can do it safely. Protect the success of your business before you invest in it.

You can find the price of our legal support for franchising here.