The franchisor’s corporate structure: preparing your existing business

When expanding an established business into a franchise network, decide early which company will act as the franchisor. Your existing operations, the rights to use the concept and the support promised to franchisees may not naturally belong within the same entity. Preparing your corporate structure does not automatically mean setting up a new company: the aim is clear responsibilities, sound financial management and agreements that the contracting company can fulfil.

1. Separate the roles of your own outlet and the network

Your existing business sells products or services to customers. As a franchisor, its responsibilities will expand to include tasks such as training franchisees, developing the shared operating model, maintaining systems and supporting network members. These tasks need designated people, working time and funding, regardless of how many companies you establish.

Start by drawing up two task lists. The first should cover customer-facing work, staff, premises and day-to-day purchasing at your own outlet. The second should cover network management, franchisee support, concept development and shared services. For each task, identify who currently does the work, which entity is party to the relevant contract and who pays the cost.

The key question is whether the future franchisor can actually deliver the services it promises. If all the expertise and staff remain in another company, simply signing agreements in the new company’s name is not enough.

Include your own work as the founder, too. If franchisee support depends on you answering the phone between serving your own customers, the organisation does not yet reflect the planned division of responsibilities. Decide who will provide support when you are unavailable.

2. Choose a structure based on real needs

The simplest option may be for your existing company to continue serving its own customers while also acting as the franchisor. This avoids transferring contracts and resources solely to accommodate a new structure. The drawback is that the financial risks and results of both activities sit within the same company.

Another option is a separate franchise company. This can make it easier to monitor the network’s finances, structure its ownership and arrange future funding. However, a separate company also creates more administration and a need for agreements between the companies. Having a common owner does not make their assets, employees or contracts shared.

Compare the options by considering at least these questions:

• Which company would any new owners or investors invest in?
• Who will employ the staff providing franchisee support?
• Which company will bear the cost of shared systems?
• Might you want to sell your own outlet separately from the franchise operation in future?
• What guarantees will lenders or landlords require?

A franchisor in Finland is not legally required to be a limited liability company. Nor does that structure remove all personal liabilities: a personal guarantee, for example, may still bind the founder. Choose the structure with an accountant and a lawyer, rather than relying solely on an assumption that it will protect you from liability.

3. Check contracts and usage rights before transferring them

If you currently operate in Finland as a sole trader, known as a yksityinen elinkeinonharjoittaja or toiminimi, moving to a limited liability company (osakeyhtiö) means establishing a new company in practice. The new company will receive its own Finnish Business ID (Y-tunnus). This is not simply a change of name on your invoices.

Before making the change, prepare a list of everything to be transferred. Include leases, financing, insurance, supplier contracts, software, domain names, obligations to customers and any permits. Check each contract to establish whether it can be transferred and whether the other party’s consent is required. Also investigate any transfer-of-undertakings rules that may apply to employees moving to the new company.

The franchisor must control the rights it promises to franchisees. For example, your existing company’s software licence may not allow it to make the system available to independently owned franchisee businesses. Similarly, the rights to use training materials commissioned from an external provider may be limited to the original client.

If the rights associated with the concept remain with a different company from the one signing the franchise agreements, confirm in writing that the franchisor is entitled to use them and grant the agreed usage rights to franchisees. Check that the arrangement will continue to work if ownership changes.

The tax treatment depends on how the changes are implemented. Do not assume that changing your business structure or transferring assets will automatically be tax-neutral. Plan the implementation before signing documents or transferring funds or assets.

4. Apply Finland’s general laws correctly

Finland has no dedicated franchising law, no special registration requirement for franchisors and no statutory franchise disclosure document in a prescribed format. However, the usual business registration and notification requirements still apply to businesses within a franchise network.

The key legislation affecting corporate structure includes the Limited Liability Companies Act, the Accounting Act and tax legislation. The Contracts Act and general principles of contract law govern the assessment of agreements. The Unfair Business Practices Act covers matters including false or misleading statements used in business. The Competition Act and EU competition rules, meanwhile, restrict what can be agreed with independently owned franchisee businesses.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation. A commitment to comply with it must be distinguished from statutory obligations. Setting up a separate franchise company does not release the franchisor from contractual liability or replace proper preparation.

5. Ensure the franchisor is ready to operate before the first agreement

Prepare a separate profit and loss budget and cash flow forecast for the chosen franchisor. Distinguish revenue from your existing outlet from franchise network revenue, even if both sit within the same company. This will show whether your own operations are quietly subsidising franchisee support, and how long that can continue.

If several companies are involved, agree their services, invoicing and responsibilities in writing. Specify, for example, who will deliver training and how staff time will be allocated. Use appropriate pricing principles for transactions and have the tax implications checked.

Finally, prepare a one-page responsibility map identifying the contracting party, rights holder, employer, service provider and invoicing entity. Check that draft agreements, systems and day-to-day operations match it.

Practical checklist: decide on tasks and responsibilities first, then choose the corporate structure. Do not sign the first franchise agreement until the contracting entity has the rights, resources and working arrangements needed to fulfil its promises.