Buying a franchise: when do negotiations become binding?

An entrepreneur planning to join a franchise network may assume that their commitment begins only when they sign. In Finland, this is not a safe assumption: depending on the circumstances, an exchange of messages or verbal acceptance can also create a contract. It is therefore worth agreeing the ground rules for negotiations before confirming a start date, accepting an offer or authorising the franchisor to begin preparations. The aim is to know exactly what you have already committed to and what is still under discussion.

1. The absence of a signature does not, on its own, protect you

Finland has no specific franchising act, no general statutory requirement for a franchise disclosure document and no dedicated franchise registration requirement. However, entrepreneurs must still comply with the usual business registration requirements and obtain any licences required for their activities. Franchise relationships are governed by, among other things, the Finnish Contracts Act and general principles of contract law, as well as legislation such as competition and trade mark law where relevant.

The Contracts Act’s rules on offer and acceptance matter even during negotiations. Accepting a sufficiently specific offer can create a contract without a document being signed later. However, not every positive message amounts to acceptance: the wording, the terms agreed, any outstanding issues and the parties’ conduct as a whole all matter.

For example, a message saying ‘I accept the terms; let’s start as agreed’ is different from ‘I am interested in continuing negotiations’. If the key terms have already been discussed, the first message carries a significantly greater risk of creating a binding commitment. Labelling an email ‘draft’ does not settle the issue if the rest of the correspondence indicates final acceptance.

The Finnish Franchising Association’s Code of Ethics calls for agreements to be provided in writing and for rights and obligations to be expressed clearly. This is industry self-regulation, not legislation. Nor does the code automatically become part of a contract. Its guidance on written agreements therefore does not mean that a verbal agreement will always have no legal effect.

2. Agree in writing what is merely preparatory

At the start of negotiations, ask for written confirmation, agreed by both parties, of the point at which the franchise agreement itself becomes binding. If the intention is to become bound only upon signing, this should be reflected in the negotiating procedure accepted by both parties, not just in your own notes.

The following wording could serve as a starting point for discussion:

The parties are negotiating a potential franchise relationship. The franchise agreement itself will become binding only once both parties have signed it. Any separate binding obligations relating to preparations will be agreed separately in writing.

This wording is a starting point, not a ready-made contractual clause suitable for every situation. A lawyer should check how it relates to the other documents. If the franchisor has already sent a binding offer or you have already accepted one, a later reservation may not remove an obligation that has already arisen.

Make sure your own conduct also follows the agreed procedure. Avoid messages expressing final acceptance before you have made your decision. Record any outstanding issues in the meeting notes and ask the franchisor to confirm your shared understanding. If you receive inaccurate notes, correct them promptly in writing.

Also distinguish decision-making from practical preparations. Attending a site visit or checking training dates should not be left open to interpretation as acceptance of the entire franchise relationship. Explain in advance whether these steps are being taken solely to assess the opportunity.

3. Treat a preliminary agreement as a commitment in its own right

A preliminary agreement is not automatically less onerous or less risky than the final agreement. Its purpose may be to oblige the parties to enter into the franchise agreement later. Whether it is binding depends on its content, not simply its title. A document labelled a ‘letter of intent’ can also contain binding obligations.

Check at least the following points:

• What are you committing to now? Are both parties merely promising to continue discussions, or also to enter into the final agreement?
• Which final agreement does it refer to? Is a specific draft identified and available, or are essential terms left to be decided later?
• Which provisions are independently binding? For example, exclusivity during negotiations or reimbursement of preparatory costs may be binding even if the franchise relationship itself remains undecided.
• When do the obligations end? Is there a deadline for negotiations and a clear procedure if no agreement is reached?
• What happens if there is a dispute? Can the other party demand that you enter into the agreement or pay damages?

Do not accept an obligation to sign ‘the franchisor’s agreement in use at the time’ later if you do not know what it contains. Such wording leaves unclear which rights and obligations you are already agreeing to.

Ask a lawyer specifically to assess whether the preliminary agreement is binding. Reviewing only the final franchise agreement is not enough if the decisive commitment has already been made.

4. Limit preparatory costs and document the end of negotiations

Even if no final agreement is reached, preparations can incur costs. The franchisor may commission design work, book training or purchase launch materials. Before any orders are placed, establish who is placing them and who will pay the bill if negotiations end.

Agree that any preparatory work you will be expected to pay for requires your separate approval. That approval should specify the scope of the work, an estimated cost or spending cap, and any cancellation charges. Simply agreeing to ‘start preparations’ can leave your liability too open-ended.

Contract negotiations do not generally oblige you to enter into a final agreement. However, freedom to negotiate does not permit misleading conduct. Creating unfounded expectations or engaging in other improper conduct can, in certain circumstances, give rise to liability arising from the negotiations. You do not automatically become liable for compensation simply because you decide not to join the network.

If you end negotiations, communicate your decision in writing. Ask for confirmation of the status of any separately agreed preparatory work and any outstanding costs. Keep all versions of the agreements, approvals and correspondence so that you can establish the sequence of events if necessary.

Practical checklist: agree when your commitment becomes binding, have the preliminary agreement reviewed and approve any chargeable preparations separately. This will allow you to assess the franchise opportunity at your own pace, without uncertainty over whether you have already given a binding ‘yes’.