Buying a franchise in Germany: getting the finance condition right

The franchise agreement is ready to sign, but the bank has not yet made a binding loan offer. If you sign now without protection, you could become liable for payments even though you lack the funds to get started. A finance condition can bridge this gap. What matters is not the clause’s heading, but which obligations arise, when they take effect and what happens if funding is refused.

1. Why a loan refusal does not cancel the agreement

Franchisees operate as legally independent business owners on their own account. Even within a supportive franchise community, securing the necessary capital generally remains their responsibility. A recommendation to approach a partner bank or help with a business plan is not a funding commitment.

A loan refusal does not generally release you automatically from a franchise agreement you have already entered into. Initial franchise fees or other contractual obligations may still fall due. Nor does a disappointed expectation of receiving public funding necessarily give you a right to exit.

Germany has no dedicated franchise legislation and no franchise-specific registration or regulatory approval procedure for franchise agreements. The principal rules are found in the German Civil Code (BGB), the German Commercial Code (HGB), where applicable, and competition law. Pre-contractual duties to consider the other party’s interests and disclose relevant information arise in particular under sections 311(2) and 241(2) BGB. However, they are no substitute for expressly agreed protection if funding does not materialise.

Before making any binding commitment, therefore, check: has funding been firmly committed, can all conditions for drawing down the funds be met, or do you need contractual protection? A bank’s non-binding assessment is not enough.

2. Choose the right contractual approach

A finance condition can be structured in different ways. You should discuss two main options with a legal adviser specialising in franchise agreements:

• Condition precedent: Under section 158(1) BGB, the contractual effects subject to the condition arise only once the agreed event occurs. This could, for example, be a precisely defined funding commitment. Any obligations that apply before then must be expressly specified.
• Contractual right to withdraw: The agreement takes effect initially, but you may withdraw from it under specified conditions. In particular, the clause must set out the deadline for exercising this right, how notice must be given and how the agreement will be unwound.

The distinction matters in practice: where an agreement takes effect immediately, payment and preparatory obligations may already arise. Withdrawing later does not automatically prevent disputes over services already provided or costs incurred.

Do not rely on wording such as “funding is assumed” or “subject to discussions with the bank”. These phrases do not make it clear whether the parties intend a genuine condition, a right to exit or merely a shared expectation.

Standard-form terms are subject to sections 305 to 310 BGB. Even in business-to-business dealings, terms that lack transparency or unreasonably disadvantage the other party may be invalid under section 307 BGB. That is no substitute, however, for reaching a clear agreement before signing.

3. Define acceptable funding and deadlines precisely

The clause should do more than require “funding” to be secured. A loan that is too small, or an offer on financially unsustainable terms, will not solve your funding problem.

Specify at least the following:

• Funding amount and scope: What minimum amount must be available for the particular venture? Does this include working capital and any necessary loans under public funding schemes?
• Acceptable terms: What limits apply, for example, to interest costs, the loan term, your own capital contribution and the security required?
• Binding commitment: Is a loan commitment sufficient, or must certain drawdown conditions also have been met?
• Timing: By what date must the commitment be received, and how will any extension be agreed?
• Evidence: What documents must you provide if funding is refused or a decision is still pending?

Also set out your responsibilities: by when must complete loan applications be submitted? Must you approach other banks after a refusal? An unlimited obligation to explore every conceivable source of finance would be of little practical use when planning your business.

The franchisor’s cooperation is equally important. If the bank needs particular contractual documents or information about the franchise system, responsibility for supplying them and the relevant deadlines should be clear. Allow for the time a bank needs to reach a decision and for any follow-up questions.

4. Protect payments and related contracts too

A condition in the franchise agreement does not automatically protect you from obligations under a property lease, an equipment leasing agreement or an order. Make a list of all contracts you are expected to enter into before the final funding decision. Ensure their conditions and deadlines are aligned.

Also clarify in writing whether any payments may be required before funding is confirmed. If money is paid in advance, the agreement must clearly state when it will be refunded and which specifically agreed services, if any, will remain chargeable. Vague deductions for “preparatory costs” create unnecessary scope for disputes.

Finally, plan for the possibility that the bank neither approves nor expressly refuses the loan. This also needs a clear procedure rather than an indefinite wait. Keep a clear record of applications, follow-up questions, decisions and any notices subject to a deadline.

Practical takeaway: If funding is still uncertain, sign only with contractual protection that has been reviewed by a legal adviser. It should clearly define what counts as acceptable funding, the deadline, the evidence required, payment arrangements and the consequences if funding falls through — and it should be consistent with your other contracts.