Buying a franchise together: agree the ground rules for shareholders

Buying a franchise with a partner can bring together skills, capital and practical input. But a jointly owned business needs more than mutual trust. When joining a franchise network, buyers must ensure that their arrangements as owners align with the franchisor’s requirements. A shareholders’ agreement can help prevent disagreements between owners from jeopardising an otherwise profitable business with plenty of customers.

1. Establish whom the franchisor will approve as an operator

If the buyer is a limited liability company owned by several people, first establish the franchisor’s approach to joint ownership. Will it approve both of you as active operators, or does it require one designated person in charge? Can an owner invest money without working in the business?

Ask the franchisor for written answers to at least the following questions:

• Which owners will be assessed and approved before the agreement is signed?
• Who must attend training and take part in day-to-day management?
• Do changes in shareholdings require the franchisor’s consent?
• What approval process applies when replacing the designated person in charge?

Distinguish between the contact person named in the franchise agreement and the legal authority to make decisions for the company. The franchisor’s day-to-day contact does not automatically have the right to make every decision that binds the company. Equally, an agreement between the owners does not, on its own, change who is authorised to represent the company externally.

If you are buying an existing outlet, do not assume that the seller’s ownership structure will be acceptable as a model for yours. Confirm the franchisor’s approval for your specific group of buyers and proposed division of responsibilities.

2. Put work commitments and financial arrangements in writing

Equal ownership does not necessarily mean equal work commitments. One owner may run the outlet day to day, while the other handles the finances alongside another job. Set out duties, expected work commitments and reporting arrangements in sufficiently concrete terms to allow performance to be monitored.

Keep three things separate: capital invested, payment for work and returns on ownership. Salary and dividends are not freely interchangeable ways of paying owners. With professional advice, assess the tax treatment of remuneration, any employment relationship and the applicable pension insurance requirements for entrepreneurs, based on each person’s actual position.

Agree how absences will be handled too. Who will arrange cover if one of you is ill for an extended period? How will duties be reassigned if an owner can no longer fulfil the agreed work commitment on a lasting basis? Automatic forfeiture of shares is no substitute for careful drafting; any consequences must be clear and legally reviewed.

Additional funding needs a procedure of its own. Define how a funding need will be identified, who decides on it and whether owners are obliged to invest more. Record what happens if only one of you can contribute. An additional capital investment, a shareholder loan and a change in shareholdings are different arrangements and should not be left to a verbal understanding.

3. Create a decision-making process that works even during a dispute

A shareholders’ agreement can specify, for example, which decisions require every owner’s approval. These might include substantial borrowing, buying another outlet or selling the business. Even so, day-to-day operations need sufficient flexibility.

Draw up a decision-making schedule that distinguishes between:

• decisions within the authority of the person responsible for day-to-day operations
• matters for the board of directors
• decisions requiring the owners’ joint approval
• changes requiring the franchisor’s consent.

The schedule must align with the allocation of powers under Finland’s Limited Liability Companies Act. A shareholders’ agreement does not override the board’s statutory duties, nor does it automatically invalidate a company decision made in breach of that agreement.

A deadlock procedure is particularly important where ownership is split equally. Agree to negotiate first and, if necessary, use an external mediator. If the disagreement continues, the agreement can provide for an orderly change in ownership. In practice, the procedure must not force the financially weaker party to give up their shares at an arbitrary price.

Test the arrangements against one scenario: the franchisor requires a decision, but the owners disagree. Who negotiates with the franchisor, how is the company’s position determined, and how are deadlines met? Simply requiring unanimity does not ensure that the business can continue to function.

4. Agree an owner’s exit arrangements before buying

A jointly owned business can continue even if one owner’s circumstances change. Agree in advance what happens in the event of a voluntary departure, long-term incapacity for work or death. Define who has the right or obligation to buy the shares, and within what timeframe.

Valuing the shares requires more than a reference to fair market value. Agree the valuation date, the financial information to be used, how any independent valuer will be selected and the payment terms. The valuation should also take account of the remaining term and conditions of the franchise agreement, as these affect business continuity.

Have the relationship between the shareholders’ agreement and the company’s articles of association reviewed. A redemption or consent clause in the articles has different legal effects from share transfer provisions in a shareholders’ agreement. As a general rule, a shareholders’ agreement binds its parties, not automatically every subsequent shareholder.

The franchisor’s approval requirements must be aligned with these arrangements. A buyout right agreed between owners does not, in itself, guarantee that the franchisor will approve the new ownership structure.

5. Have all the agreements reviewed under Finnish law

Finland has no dedicated franchising legislation, no statutory requirement for a pre-contractual disclosure document in a prescribed format, and no franchise agreement registration system. Franchise relationships are governed by general legislation, including the Contracts Act, the Unfair Business Practices Act, the Competition Act and the Trademarks Act. The Limited Liability Companies Act is central to relations between shareholders and the company.

The absence of specific disclosure legislation does not permit misleading information. General duties relating to the formation of contracts and the accuracy of information supplied are also essential when buying jointly. The Finnish Franchising Association’s code of ethics is self-regulation, not law.

Give your lawyer the franchise agreement, shareholders’ agreement and articles of association at the same time. Ask them to check, in particular, that the provisions on work obligations, decision-making powers and changes in ownership are compatible.

Practical reminder: before buying, decide who does the work, who makes the decisions and how either owner can leave. Put the answers in writing so that they also work alongside the franchise agreement.