Buying a franchise: Make the purchase conditional on financing

A strong franchise network can be a good foundation for your business, but it does not mean your start-up funding is secured. If you sign the franchise agreement before the bank has made a firm commitment, you could face binding obligations without the money to meet them. Financing should therefore be an explicit condition of the purchase – not simply something everyone expects to fall into place.

Know the difference between interest and a binding commitment

A positive conversation with the bank does not necessarily amount to a commitment to lend. The bank may still need credit approval, evidence of your own capital contribution or a review of the final franchise agreement. Even a written offer may contain conditions that must be met before the loan can be released.

Ask the bank to explain exactly where things stand. What has been approved, what is outstanding, and when can the money actually reach the business’s account? Also ask how long the commitment remains valid and which changes to the project would require fresh approval.

Prepare a short overview with three columns:

• Funding source: Your own capital, a bank loan, an overdraft facility or leasing.
• Conditions: For example, evidence of your capital contribution, a signed agreement or approval of the equipment.
• Availability: When the funds can be used and any restrictions that apply.

Leasing fixtures and equipment, for example, does not necessarily provide money for wages and stock purchases. Your overall financing package must therefore match the type and timing of payments, not just the total investment required.

If the franchisor refers you to a particular bank, you should still obtain written confirmation of your own position. An existing relationship between the bank and the franchise network is no guarantee that your particular business will receive funding.

Understand the Danish rules before committing

Denmark has no specific franchise legislation, no franchise-specific registration scheme and no legally required standardised pre-contract disclosure document. The general rules on business registration still apply. Franchise agreements are governed primarily by the Danish Contracts Act and general principles of contract law, while legislation such as the Danish Marketing Practices Act and Competition Act may also be relevant.

The absence of specific disclosure requirements does not mean that franchisors are free to provide false information or withhold material facts. General duties to disclose information in good faith, and rules on liability, may apply depending on the circumstances. However, they do not give you an automatic right to withdraw if the bank refuses financing.

As someone preparing to run a business, you should not expect the cooling-off rights available for certain consumer purchases either. A financing condition must therefore be expressly agreed. Section 36 of the Danish Contracts Act allows unfair agreements to be amended or set aside, but you should not base your purchase on that provision as a safety net.

Be careful with reservation agreements and preliminary documents too. A document’s heading alone does not determine whether it is binding. Payment obligations or other commitments can arise even before the final franchise agreement has been signed.

Make the financing condition specific

The wording ‘subject to financing’ leaves many questions unanswered. Is any available loan sufficient? Must you accept a significantly more expensive option? And what happens to money you have already paid?

Ask a lawyer to draft the condition so that it clarifies at least the following:

• Scope: Which funding sources and what total funding requirement must be covered?
• Terms: What limits are acceptable for interest rates, loan duration, security and your own capital contribution?
• Deadline: When must financing receive final approval, and can the deadline be extended in writing?
• Evidence: What must you provide if you cannot obtain financing?
• Consequences: Does the agreement lapse automatically, or must you give notice by a particular deadline?
• Repayment: Which payments will be refunded, when, and subject to what deductions, if any?

Also agree whether you must apply to specified lenders or make clearly defined efforts to obtain financing. Avoid a vague obligation to accept any arrangement you may be offered.

A bank’s commitment may depend on a signed franchise agreement, while you want the bank’s approval before signing. This circular problem can often be resolved through a conditional agreement. The bank and your lawyer should confirm that the arrangement meets both sides’ requirements.

Coordinate payments and other orders

A condition in the franchise agreement does not automatically protect you against claims from other suppliers. If you order fixtures and equipment or engage tradespeople separately, those contracts may remain binding even if the franchise agreement lapses.

Draw up a payment schedule covering the period from signing through to the first few months of trading. Mark each payment as deferrable, conditional or unconditionally binding. Include the cash requirements that would arise if opening were delayed, and check whether your credit facility would be available in that situation.

Ask for written clarification before the franchisor orders anything on your behalf. It should be clear who is liable and whether the expense requires your prior approval. Then plan the sequence so that, wherever possible, irreversible commitments are made only once the financing is available to draw down.

Practical takeaway: Sign only when financing is either firmly secured or covered by a precise condition reviewed by your adviser. At the same time, check that separate orders and early payments will not leave you footing the bill if the loan falls through.