Before Buying a Franchise, What Contract Terms Should You Check?

Who this article is for, and what the main points are

For anyone about to pay money to buy a franchise — whether a single branch or multi-branch rights — and whether Thai or foreign.

There are three main points.

1. The upfront fee is not the real cost. The real cost is the upfront fee, plus fit-out, equipment, monthly royalties, marketing fees, and raw materials you are required to buy from the seller, over the entire term of the contract.
2. Most franchise contracts are drafted by the seller. The buyer has less bargaining power than you might think, but you can still ask for amendments, ask for information, and walk away before signing. After signing, your options narrow considerably.
3. Read the contract together with the numbers. A contract can be legal in every clause and still leave the branch losing money if the mandatory costs are higher than the profit that is realistically possible. For the full picture, see Franchise services.

Does Thailand Have a Franchise Law?

No. Thailand does not yet have a specific Franchise Act. The buyer must rely on a combination of several laws.

The first Trade Competition Commission Notification was published in the Royal Gazette on 6 December 2562 and has been amended twice. No. 3 revised only Clause 4 concerning the opening of new branches. A person who violates Section 57 may be subject to an administrative fine of not more than 10 percent of revenue in the year in which the violation was committed. Before signing, you should check the Commission's website again to see whether there is a newer version.

Things to know: This Notification is a guideline that the Commission uses to consider which conduct falls under Section 57. The Notification itself is not a direct basis for a suit, but if the seller's conduct actually violates Section 57, Section 69 allows an injured person to sue the violator for damages. In practice, therefore, the buyer uses the Notification as a basis for negotiation, for complaints to the Commission, and to support challenges to contract terms or claims for damages.

What the Franchisor Must Disclose Before Signing

Clause 3 of the Notification requires the franchisor to disclose, before entering into the contract, information on four matters:

1. Fees and expenses, such as the franchise fee, royalty, marketing fee, training fee, cost of required equipment, how they are calculated, payment, and refund conditions
2. The business plan, such as management assistance, training, the number and location of other franchisees in nearby areas, both current and future, and sales promotion
3. Rights in trademarks, patents and copyright, the period for which they are valid, the scope of the licence, and restrictions
4. Renewal, amendment, termination and revocation of the contract

In practice, ask for these as documents and keep a complete set:

• A table of total costs from opening the branch through the full term of the contract
• The full draft contract, together with the appendices and any manuals the contract refers to
• A list and the locations of branches that are open, that have already closed, and that are planned to open near our branch
• Evidence that the franchisor owns the trademark or genuinely has the right to license it
• The performance figures for sample branches, stating whether they are branches the franchisor opened itself or franchisees' branches

If the franchisor refuses to give any one of these items, that is a warning sign in itself.

What Other Costs Are There Besides the Initial Fee

Read the expenses section in full and put them all in the same table.

1. Monthly royalty — whether it is calculated on sales or is a fixed amount, and whether it is calculated on sales before or after discounts.
2. Marketing fund — how much you pay, what it is used for, and whether the buyer can ask to see the account of how the money is spent.
3. Mandatory fit-out and equipment — whether you must use a contractor or manufacturer designated by the seller, and whether the seller can require you to renovate the shop during the contract.
4. Training — whether the first training is included in the initial fee, and whether repeat training is charged.
5. Software and systems — POS system fees, monthly membership fees, and who owns the customer data.
6. Deposits and security — when they are refunded, and what can be deducted from them.
7. Other fees — such as site inspection fees, transfer fees, renewal fees.

The question that covers everything: ask the seller which expenses the seller can amend unilaterally during the contract, and where that condition is written.

Exclusive Territory: Can the Seller Open a Branch Near Us?

Don't take the words "we won't open nearby" at face value. Look at whether the contract defines the territory clearly — whether it is a radius, a zone, or a list of projects — and whether the prohibition covers only the seller's own branches or also includes other channels such as delivery, online, or stores in department stores.

Clause 4 of the Notification (No. 3) sets out the approach requiring the seller to notify the nearest buyer and give that buyer the right to open the new branch first when the seller is going to open one itself, or is going to grant the right to another buyer or to any other person, and the seller must allow at least 30 days for consideration. There are two exceptions.

• The existing buyer's performance fails to meet the criteria that the seller has set clearly and notified in advance.
• It is an area development franchise with an existing branch expansion agreement, for which the seller must have justifiable business, marketing, or economic reasons.

What you must ask the seller to write into the contract is the performance criteria the seller uses to cut off this right. If the criteria are unclear, the seller can claim at any time that we "failed to meet the criteria."

Forced Purchase of Goods and Equipment, and Price Setting: What Is Allowed

Clause 5 of the Trade Competition Commission (กขค.) Notification lists conduct that may be deemed unfair if done without reasonable justification

• Requiring the purchase of goods or services unrelated to the franchise, and only from the seller or from suppliers designated by the seller.
• Setting purchase quotas above actual requirements, and prohibiting the return of the excess.
• Adding conditions after the contract is signed, such as requiring the purchase of additional goods — unless there is a business reason, or a reason to maintain reputation, quality and standards, and it must be done in writing.
• Prohibiting purchases from others whose quality is equal but whose price is lower.
• Prohibiting price reductions on perishable goods or goods nearing expiry.
• Setting different conditions for different buyers to the point of discrimination.

You should therefore read these parts of the contract carefully.

1. Which goods must be purchased from the seller, and which goods may be purchased from other sources if they meet the standards.
2. Is there an approval procedure for other supply sources, how long does it take, and on what grounds may approval be refused?
3. Is there a minimum purchase volume, and can excess goods be returned?
4. Can the prices of the goods the seller sells to the buyer be adjusted unilaterally, and is there a ceiling?
5. To what extent can the buyer set its own in-store selling prices?

On this last point, many contracts state a recommended price, which is something that can be agreed; but you should read whether it is a recommended price or a mandatory price.

Contract Term and Renewal

A franchise agreement that looks good at signing can become very expensive at renewal. Check:

• How long the contract term is, compared with the payback period based on the figures the franchisor gave you (a contract shorter than the payback period is a warning sign).
• Whether the right to renew belongs to the franchisee, or whether the franchisor decides unilaterally — and how far in advance notice must be given.
• Whether renewal may require signing a new agreement on terms different from the original, for example a higher royalty.
• The renewal fee, and whether the shop must be upgraded to new standards — and who bears that cost.
• The conditions for amending the agreement and the manual during the term: how far can the franchisor amend them unilaterally?

Renewal terms are one of the four matters the franchisor must disclose before signing under the notification, so ask for the exact clause in the agreement to be pointed out to you.

Contract Termination and Post-Termination Non-Compete

Check both sides for balance.

• When can the seller terminate? Must there be a material breach only, or can the seller terminate on broad grounds such as failure to meet standards? Is there a cure period?
• Can the buyer terminate on its own? And what must the buyer pay?
• Effects after termination Must the mark and store format cease to be used immediately? Will the seller buy back inventory and equipment? What, if anything, is returned for the fit-out costs incurred?
• Liquidated damages Upon breach of contract, if the amount is excessive, the court may reduce it to a reasonable amount under Section 383 of the Civil and Commercial Code.
• Non-compete clause How long is the same type of business prohibited? In what area? And is only a business that copies the system prohibited, or is everything similar prohibited?

On non-compete clauses, most franchise agreements are standard-form contracts, that is, contracts made in writing, with essential terms predetermined, and used by one party in carrying on its business. Section 4 of the Unfair Contract Terms Act B.E. 2540 provides that a term that gives the drafting party an excessive advantage is an unfair contract term and is enforceable only to the extent that it is fair and reasonable in the circumstances. This is a legal mechanism, not a guarantee that the prohibition will fall away by itself. Assume that we must negotiate before signing.

Trademark: Does the Seller Really Have the Right to Let Us Use It?

What is being purchased is the right to use the brand, so this must be checked before any money is paid.

1. Search the Department of Intellectual Property database to see in whose name the trademark is registered, whether it covers the goods or services we intend to sell, and what its status is.
2. The person granting us the right must be the owner of the trademark, or must actually be able to sub-license it. In the case of a foreign franchise, ask for a letter from the owner authorising the Thai seller.
3. Section 68 of the Trademark Act B.E. 2534 provides that a licence agreement for a registered trademark must be made in writing and registered with the Registrar at the Department of Intellectual Property (service marks follow the same principle).

If it is not registered, the Supreme Court has held in a case involving a business system with a service mark that the requirement of a written agreement and registration is a form of juristic act, so the licence agreement is void only insofar as it grants the use of the registered trademark, while the other, severable terms of the agreement remain enforceable. The practical effect is that our right to use the brand may be insecure, even though we have already paid and fitted out the shop. Ask the seller to confirm in writing that the licence agreement will be registered, and keep a copy of the application. See more at Trademark Registration

If the Seller Is a Foreign Company, How Is Tax Handled?

In short, if we pay royalties to a foreign company that does not carry on business in Thailand, the payer is required to withhold tax at source and remit it under Section 70 of the Revenue Code. The applicable rate may differ under that country’s double tax agreement. A tax adviser should review this beforehand, and the contract should clearly state whether the agreed royalty amount includes tax and who bears the burden.

The Business Does Not Perform as Pitched: What Are the Options?

Start by separating the issues that are often conflated.

• Sales are lower than the seller stated because the market or location changed The seller is usually not liable if the contract does not guarantee sales.
• The seller presents false information to make us sign for example, a sample branch that does not exist, or doctored profit figures. This is fraud under Section 159 of the Civil and Commercial Code (ป.พ.พ.). If it reaches the point that, without the deception, the contract would not have been made, that expression of intent is voidable; the deceived party may rescind it within the period prescribed by law.
• The seller fails to provide the support specified in the contract and business plan This is a breach of contract.

What should be done in order:

1. Preserve evidence Presentation documents, projections, emails, chat messages, quotations, and documents the seller provided before signing.
2. Do not stop paying or stop operating on your own without consulting because it may make us the breaching party ourselves.
3. Prepare a notice of claim Stating the facts, the contractual terms that were disregarded, and what is requested, for example, fixing the support, a partial refund, or terminating the contract.
4. Check whether it falls under a กขค. (Trade Competition Commission) notification for example, forcing excessive purchases or opening a nearby branch without notice, and consider filing a complaint with the กขค.
5. Business options See whether the contract allows transferring rights or selling the branch, how the seller must approve the transferee, and what fees are charged.

If you need to send a notice of claim, see Demand Letter Drafting Service. To sell the branch to another party, see Business Sale and Purchase Service.

Franchise Contract Checklist Before Signing

1. Information covering all four matters under Section 3 of the กขค. (Trade Competition Commission) notification has been received as documents before signing.
2. There is a table of total costs covering every item throughout the contract term, and you know whether the franchisor can add expenses unilaterally.
3. The exclusive territory is clearly specified, and the performance criteria the franchisor uses to terminate the right are written into the contract.
4. Products that must be bought from the franchisor have justification and quality criteria; equivalent products can be bought from other sources, and there are no excessive quotas.
5. The contract term is not shorter than the payback period; renewal rights and renewal fees are clear.
6. The termination grounds of both parties are balanced, there is a cure period, and the consequences after termination are known.
7. Non-compete restrictions are limited as to time, area, and type of business.
8. The trademark register has been checked, and the franchisor warrants that it will register the licence agreement.
9. There is a right to transfer or sell the branch, with clear conditions and fees.
10. Oral promises the franchisor has made about sales or profits are written into the contract or an annex, or confirmed in writing.

Read more

• Guide: Trademark registration in Thailand
• Who owns the brand when setting up a company in Thailand
• Business contract checklist
• Service: Franchise
• Service: Drafting and reviewing business contracts and documents
• Service: Trademark registration