Buying a franchise with a business partner: what to agree before signing

Buying a franchise with a business partner can bring together capital and complementary skills, but it also creates decisions that the franchisor will not resolve for you. In franchising, standardised operations are no substitute for sound ownership and governance arrangements. Before making any commitments, buyers need to agree on who invests, who manages the business and what happens if there are losses, disagreements or a wish to leave.

1. Separate ownership rules from franchise rules

There are two distinct relationships: the one between the owners of the company that will operate the outlet, and the one between that company and the franchisor. The company’s constitutional document and any shareholders’ agreement govern the first; the franchise agreement governs the second. These documents must be compatible.

In Brazil, Law No. 13,966/2019, known as the Franchise Law, regulates franchising and requires franchisors to provide a franchise disclosure document, known locally as the Circular de Oferta de Franquia (COF). Among other things, it must describe the desired franchisee profile and any requirements for direct involvement in operations and management.

The COF must also set out any rules on transfer or succession. This matters because replacing a business partner or changing control of the company may be subject to contractual conditions and the franchisor’s approval.

The COF must be provided at least ten days before the franchise agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a connected person or company. This is a minimum advance disclosure period, not a deadline for completing your review.

Ask your lawyer to compare the company’s ownership and governance documents with the COF and the draft franchise agreement. Do not assume that an agreement between the buyers will oblige the franchisor to accept future changes.

2. Document investment, work and payments to partners separately

Before discussing ownership percentages, draw up a table showing how much money each participant will contribute, when it will be paid and what role each person will have. Keep three matters separate: ownership interests, remuneration for work and profit distributions.

One partner may invest more but work less, while another may manage the outlet day to day. This needs to become a formal arrangement, rather than an expectation of compensation later. In Brazilian limited liability companies, services cannot be used to pay up share capital. If the intention is to give the operating partner an ownership stake progressively, that arrangement will need an appropriate legal structure.

With accounting and legal support, record the following:

• Initial investment: the amount, deadline and evidence required for each contribution.
• Additional funding: the procedure for approving further contributions and what happens if someone cannot contribute their share.
• Management remuneration (pró-labore): the basis for paying partners who actually work in the business.
• Profits: the conditions for distributions, taking account of reported profits and cash requirements.
• Loans from partners: the documentation and terms, clearly distinguishing these loans from share capital.

Run through a simple scenario: the outlet needs extra funding, but only one partner can contribute. Will the solution be a loan, a capital increase or another arrangement? Settling this in advance avoids negotiations under pressure.

3. Define who makes decisions and how finances will be controlled

Equal ownership does not, in itself, settle how the business will be managed. Without decision-making rules, two partners can block purchases, recruitment or payments needed to keep the outlet running.

Agree on who will manage the business and which actions require joint approval. Set limits for spending, borrowing, providing guarantees and making investments outside the budget. These powers should be reflected in the appropriate legal documents, including the company’s constitutional document where necessary.

Also agree on a regular reporting process. All partners should have structured access to the information they need to monitor the business, rather than relying on occasional messages from the manager.

A monthly reporting pack could include the cash balance, a profit and loss statement, debts, upcoming payment obligations and a comparison of budgeted and actual figures. The accountant should advise on preparing and interpreting these documents.

Set out a process for resolving deadlocks too: a formal meeting, a negotiation period and, if needed, mediation. The mechanism must enable decisions without breaching the law, the company’s constitutional document or its franchise obligations.

4. Plan a partner’s exit before they join

The agreement should address voluntary departure, death, incapacity and failure to meet obligations, as appropriate to the chosen structure. With legal advice, define how an ownership interest will be valued, who may buy it and how payment will be made.

Avoid vague formulas such as “market value to be agreed”. Discuss valuation criteria, the treatment of debts and the procedure for appointing an independent valuer. Any instalments for buying out a partner must also be affordable for whoever will pay them.

Review personal guarantees separately: selling an ownership interest does not automatically release someone from a guarantee or another obligation they have undertaken. Release may require the creditor’s consent.

In practice: before buying, put the investment, management and exit arrangements in writing. Only proceed once they are compatible with the franchise documents and understood by every partner.