Buying a franchise: Make the agreement subject to financing

When you buy into a franchise network, the franchise agreement may be ready before the bank has made its final decision. If you sign without a suitable financing condition, you risk being bound to the purchase even if your loan is not approved. A financing condition therefore needs to be a specific, agreed contractual term – not simply a note that you are talking to the bank.

1. Distinguish between the bank’s interest and confirmed financing

A positive conversation with the bank is not necessarily a binding loan commitment. The bank may still need to assess the franchise agreement, your budget, your own financial contribution or the security you can provide. Even a written commitment may contain conditions that have not yet been met.

Ask the bank to set out in writing what is still required before the funds can be made available. In particular, ask:

• Has the credit assessment been completed, or is it only a preliminary assessment?
• Which documents and approvals are still outstanding?
• Is a personal guarantee or additional security required?
• What is the earliest date on which the funds can be released?
• How long is the offer valid, and what conditions could cause it to lapse?

Also distinguish between a loan for the acquisition itself and funding for the subsequent running of the business. If the bank is only willing to finance the purchase price, your overall funding plan may not yet be in place.

Next, draw up a list of the agreements you are expected to sign and the payments due before opening. The aim is to identify where you could become bound before funding is available.

2. Understand the Danish legal framework

Denmark has no specific franchise legislation, no mandatory standardised franchise disclosure package and no specific registration scheme for franchise agreements. The usual business registration requirements still apply, but registration does not amount to official approval of your franchise agreement or funding plan.

The Danish Contracts Act and general principles of contract law are central to determining when you become bound and how a financing condition should be interpreted. The Danish Marketing Practices Act may also be relevant to information you receive during the sales process. Depending on the circumstances, general duties of disclosure and good faith may come into play if material facts are withheld or presented misleadingly.

There is no specific franchise rule that automatically releases you from the agreement if the bank turns down your application. Nor should you assume that you have a general right to cancel, as with certain consumer purchases: you will normally enter into a franchise agreement in a business capacity.

The financing condition must therefore be negotiated and accepted by the other party. Simply telling them that you still need a loan does not, in itself, provide the same protection as a clear contractual condition. Have a lawyer check both the wording and how it fits with the rest of the agreement.

3. Make the condition specific and verifiable

The wording ‘subject to bank approval’ can leave several questions unanswered. Which financing needs to be approved? By when? And what happens if the bank offers a smaller amount or imposes requirements you cannot meet?

Ask for the agreement to address the following:

• Scope: Which parts of setting up the business must the financing cover?
• Terms: Should there be agreed limits on, for example, your own financial contribution, personal guarantees or security requirements?
• Deadline: By when must financing be confirmed, and can the deadline be extended by written agreement?
• Evidence: How do you document a refusal or an insufficient offer without disclosing more personal financial information than necessary?
• Notice: Who must be notified, how and by what deadline?
• Effect: Does the agreement lapse automatically, or must you actively give notice that you are invoking the condition?

Also clarify what steps you must take to secure financing. For example, must you apply to a particular bank or submit specified documents by a deadline? Avoid vague expectations that you must accept any financing option available.

A practical example is where the bank approves the loan but requires a personal guarantee that exceeds the agreed limits. A condition that only refers to an outright loan refusal may not cover that situation. Acceptable financing terms should therefore be agreed in advance.

4. Ensure the protection covers all related agreements

A financing condition in the franchise agreement does not automatically release you from separate agreements with a seller, landlord or equipment supplier. Each party must accept the conditions that are to apply to their particular agreement.

Compare the deadlines across the agreements. Being able to withdraw from the franchise agreement is of limited help if you are already unconditionally bound by a lease or business acquisition agreement. Discuss with your adviser whether signatures should be coordinated or whether the relevant agreements should include equivalent financing conditions.

Also agree what happens to any sums you pay while the bank is considering your application. Specify which amounts will be refunded, which documented costs, if any, may be deducted, and when repayment must be made. Do not leave this to later negotiation.

Keep the bank’s responses, agreed deadline extensions and your notices together. Comply with the notice requirements even if the franchisor already knows the bank’s decision.

Practical rule of thumb: Only sign once financing is fully confirmed, or when a precise, agreed financing condition protects you under every agreement by which you will be bound.