Buying a franchise: check which company you are contracting with

When buying a franchise, you will often focus on the concept and the prospects for your own outlet. It is just as important to establish which company you are actually entering into a long-term relationship with. Franchising brings together independent business owners, but a franchise network’s public-facing name may conceal several different companies. Your contracting partner’s background and financial capacity affect its ability to keep its promises after you have paid the initial franchise fee.

1. Establish which company is bound by the agreement

Start with the first page of the franchise agreement. Note the contracting company’s full name, Finnish Business ID (Y-tunnus) and registered domicile. Compare these details with the offer, payment instructions and the franchise organisation presented to you. If the names differ, ask for a written explanation of each company’s role before signing or paying anything.

A familiar franchise brand is not necessarily the name of the company signing the agreement. Your contracting partner might, for example, be a Finnish subsidiary or a company holding regional franchise rights. As a rule, a parent company is not liable for its subsidiary’s contractual obligations simply because it owns it.

Check the company’s registered details and who is authorised to represent it using an up-to-date extract from the Finnish Trade Register. If the extract does not establish the signatory’s authority, ask for evidence of their authorisation. Also make sure the schedules to the agreement name the same legal entity or clearly explain the roles of any other companies.

Ask the franchise network for a simple corporate structure chart showing:

• the party to the franchise agreement and the recipient of payments
• the providers of the network’s key services
• the contracting company’s owners and any parent company
• any dependencies between companies within the group.

This chart helps distinguish the brand name from legal responsibility. Its purpose is not to challenge the group structure, but to show which company you can require to fulfil the agreement.

2. Assess the contracting company’s financial capacity

A strong sales forecast for your own outlet does not remove the financial risk associated with the franchise company. If your contracting partner cannot maintain shared systems or organise operations, the effects may extend across the entire franchise network. Your assessment should therefore focus on the company responsible for the contractual obligations, not simply the best-known company in the group.

Obtain the available financial statements for recent years and request more up-to-date financial information if necessary. Review the material with an accountant or another financial adviser. Look beyond profit or loss to equity, debt, liquidity and any concerns raised by the auditor. A single loss does not necessarily mean the relationship is unsustainable, but you need to understand why the loss arose and whether funding is sufficient.

Also establish where the franchise company’s income comes from. Does it depend on initial fees from new franchisees, or does the existing franchisee network support ongoing operations? Ask how shared services will be funded if the opening of new outlets slows down.

If the contracting company is new and has little financial history, ask for details of its funding and available resources. A verbal promise of support from an owner is not equivalent to a binding funding commitment or guarantee. If that support is central to your decision to buy, have its legal significance assessed by a lawyer.

3. Identify responsibilities and dependencies in practice

Franchise services may be provided by a company other than the party to the franchise agreement. This is not a problem in itself. The risk arises if the agreement does not make clear who has overall responsibility and what happens if a service provider changes or ceases operating.

Ask the franchise network to explain how a few everyday situations would be handled. Who do you contact if the point-of-sale system stops working? Who deals with an incorrect invoice from the network? Who can make decisions on the network’s behalf that are binding on you? Compare the answers with the agreement and its schedules.

Also establish whether the network relies heavily on one key person. Ask how communication and decision-making are handled in their absence. Where possible, speak to existing franchisees about whether responsibilities in practice match the written description. Their experiences supplement the documents, but do not replace them.

Summarise your findings in a short table: issue, responsible company, supporting document and outstanding question. Raise unresolved points during negotiations. If your contracting partner repeatedly refers to another group company’s responsibility, make sure you obtain the necessary commitment from that company. A mention in promotional material is not the same as a contractual obligation.

4. Understand the Finnish regulatory framework

Finland has no specific franchising act, no statutory franchise-specific pre-contractual disclosure document and no compulsory registration system for franchise agreements. This means no public authority approves the franchise network or agreement on your behalf. An ordinary Trade Register entry is neither a mark of quality nor an assurance of a company’s ability to pay its debts.

The contractual relationship is governed by general legislation. Finland’s Contracts Act covers matters including the validity of agreements and the adjustment of unreasonable terms. The Unfair Business Practices Act prohibits, among other things, false or misleading statements in business. The Competition Act and applicable EU competition rules restrict anti-competitive contractual terms. The Limited Liability Companies Act is also relevant when assessing companies’ liabilities.

The significance of general contract-law principles concerning loyalty and disclosure is assessed case by case. Buyers also have a responsibility to investigate material information that is available to them. The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not special legislation or an official guarantee of a franchise network’s financial health.

Keep the explanations and documents you receive, and ensure that commitments decisive to your purchase are included in the agreement. If the corporate structure or financial responsibilities remain unclear, clarify them with an independent adviser before committing.

Practical checklist: know who signs, who receives the payments and who is responsible for delivering what has been agreed. Assess that company’s ability to fulfil its obligations — not just how well known the brand is.