Buying a Franchise: Protecting Yourself with a Financing Condition

Joining a franchise network often requires a business loan. Yet signing the agreement before approaching a bank can leave you committed before you have the funds you need. A financing condition precedent can address this risk, provided it is carefully negotiated and drafted. Here is how to put this protection in place before buying a franchise in France.

1. Understand what the clause actually protects

A condition precedent makes an obligation dependent on a future, uncertain event: in this case, obtaining financing as defined in the agreement. This mechanism is governed by Articles 1304 onwards of the French Civil Code. If the condition is not fulfilled in the circumstances specified, the conditional obligation is deemed never to have existed.

A bank’s refusal to lend does not automatically release you from a franchise agreement. Protections that apply to certain residential property loans to individuals should not be assumed to apply to business borrowing. The agreement must therefore expressly state what happens if no loan is obtained.

France has no single statute covering all aspects of franchise law. The relationship is governed, among other things, by general contract law, commercial law and competition law. Pre-contractual disclosure is regulated by Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law, and Article R. 330-1.

Where these disclosure rules apply, the pre-contractual disclosure document and draft agreement must be supplied at least twenty days before signing or, where applicable, before any advance payment. This period is not a substitute for a financing condition, nor does it create a general right to withdraw after signing.

2. Define the required loan without leaving grey areas

Wording such as ‘subject to obtaining a loan’ is not precise enough. It leaves several questions unanswered: what amount, repayment term and security requirements will qualify as obtaining the agreed financing?

Work with your accountant to draw up a list of the terms to include in negotiations:

• the amount of financing sought, or an expressly agreed range;
• the minimum or agreed repayment term;
• the maximum acceptable interest rate and how fees will be treated;
• the permitted security requirements, including any personal guarantee;
• the deadline for obtaining financing;
• the bank document that will establish that the condition has been fulfilled.

This last point is essential. An agreement in principle may still be subject to assessment of the application, provision of security or an internal decision. Define the level of commitment required from the bank and how any outstanding conditions will be handled.

Also address the possibility of partial approval. A loan below the amount required should not simply be treated as the agreed financing. Likewise, if you are unwilling to provide a personal guarantee above a certain limit, have that limit written into the agreement: it cannot remain a preference expressed only verbally.

3. Set out the application process, deadlines and payment arrangements

The clause should protect an applicant who takes the required steps, not provide a way to withdraw without reason. Article 1304-3 of the French Civil Code provides that a condition precedent is deemed fulfilled if the party with an interest in its fulfilment has prevented it from being fulfilled.

Specify the steps required: the deadline for submitting the application, any required number of lenders to approach, the terms on which applications must be made and the supporting evidence to provide. Do not commit to steps that are unrealistic given banks’ processing times.

Keep copies of applications sent, acknowledgements of receipt, additional documents and decisions received. An application on terms different from those specified in the agreement could give rise to a dispute.

Set out how the franchisor must be notified, including the recipient, method, supporting evidence and deadline. If the bank’s assessment is delayed, negotiate a written extension before the deadline expires rather than relying on verbal assurances.

Finally, clarify what happens to each payment: the initial franchise fee, any reservation payment or any other sum. Specify how and when payments will be refunded if the condition is not fulfilled. Any proposed deduction must have a clear contractual basis, which you should have reviewed before paying.

4. Coordinate the commitments associated with the project

Protection included in the franchise agreement does not automatically cover other commitments. An equipment order, a contract for building work or a purchase agreement may remain binding even if the loan is refused.

Draw up a table listing each contract, its signing date, the sums committed and its own financing-related protection. Ask a lawyer to check that the deadlines and triggering events are consistent. The aim is to avoid one commitment becoming unconditional while the project’s overall financing remains uncertain.

Finally, request written confirmation that the condition has been fulfilled once the loan meets the agreed criteria. Do not confuse this stage with the actual release of funds, which may depend on further banking formalities.

Key takeaway: before signing anything, define an acceptable loan, the steps you must take and what happens to any money paid. Then check that the project’s other contracts will not leave you committed without financing.