Buying a franchise: secure your financing before you sign

You have found the right brand, and your initial meeting with the bank went well. Should you sign now? When joining a franchise network, this is precisely where an avoidable risk arises. A bank’s interest in financing your business is not the same as a binding loan commitment. This guide explains how to align your funding needs, loan drawdown conditions and contractual obligations so that you do not become legally bound without secure financing.

1. Work out your funding needs through to opening

The initial franchise fee is not the only expense you need to finance. What matters is how much cash will actually go out before opening and during the start-up phase. Prepare a monthly cash flow forecast, separate from your profitability forecast: a profit on paper does not automatically mean there is enough money in the bank.

Divide your outgoing payments into four groups:

• One-off start-up costs: Initial franchise fee, professional advice, business formation and any necessary permits.
• Premises and equipment: Deposit, alterations, fit-out, technology and initial stock.
• Working capital needs: Rent, staff, insurance, software and contractual fees payable before sufficient cash starts coming in.
• Personal financial provision: Living costs and personal commitments you need to cover during the start-up phase.

For each item, check whether the amount includes or excludes VAT. Even recoverable input VAT can tie up cash initially. Ask your tax adviser when input VAT can be deducted and when you can expect any refunds.

Include a separate reserve for specific risks, such as delays to building work or a later opening date. Rather than choosing an arbitrary lump sum, calculate the extra payments such a delay would trigger. Distinguish between your own funds that are readily available and assets that would first need to be sold or otherwise released.

2. Check when and how each source of finance is available

Your own capital, investment loans, working capital facilities and leasing serve different purposes. Long-life equipment should not simply be financed through a credit facility that can be withdrawn at short notice. Equally, a loan restricted to fit-out costs will be of little use if you later lack the cash to pay wages.

For each source of finance, obtain written confirmation of the following:

• How much money will actually be available?
• Which expenses can it be used for?
• What security and contribution from your own funds are required?
• Which documents must be provided before funds are released?
• When do interest payments and capital repayments begin, and what other costs apply?

An initial period without capital repayments does not automatically mean there are no payments to make. Interest and other contractually agreed charges may still be payable. Include all payments in your cash flow forecast.

Depending on your project and eligibility, publicly supported loans and German guarantee banks may have a role to play. However, this does not give you an automatic entitlement to funding. Check early with your main bank whether an application must be submitted before the project starts, and which actions count as starting the project under the relevant scheme. Do not rush into signing a binding contract on the assumption that support can be added later.

When comparing offers, look beyond the interest rate. Personal guarantees, options for making additional repayments and conditions for further drawdowns can be just as important to your exposure to risk.

3. Align loan approval with your legal commitments

Germany has no standalone franchise law and no state franchise register. Franchise agreements are governed primarily by the general contract law provisions of the German Civil Code (BGB) and, where applicable, commercial law. Pre-contractual duties to protect the other party’s interests and disclose relevant information arise in particular under sections 311(2) and 241(2) BGB. Standard contract terms are subject to sections 305–310 BGB, taking account of the rules applicable to business-to-business transactions.

The key point for your financing is this: a franchise agreement is not automatically conditional on loan approval. If your financing falls through after you sign, your agreed payment obligations do not simply disappear. Nor should you assume that new franchisees have a general statutory right to withdraw.

Ask a lawyer whether the agreement should include a condition that prevents it from taking effect until financing is secured, or a clearly defined right to withdraw. In particular, the following points must be unambiguous:

• What financing must be secured, and by what date?
• What evidence is sufficient to demonstrate approval or refusal?
• What steps are you expected to take to help secure the financing?
• What happens to fees or reservation payments already paid?

Any such provision must match the actual bank financing arrangements. Otherwise, a loan commitment with outstanding drawdown conditions could make the agreement binding even though you still cannot access the money. Review the draft agreement and the bank’s conditions together with the relevant professional advisers.

4. Confirm that everything fits before signing

Financing often depends on more than the franchise agreement alone. A lease for your premises, a building works contract and an equipment leasing agreement can create separate obligations. A protective clause in the franchise agreement does not automatically protect you in dealings with landlords or suppliers.

Prepare an overview showing each contracting party, signing date, first payment due date, drawdown conditions and consequences of delay. Highlight dependencies in particular: does the bank require a signed premises lease even though the deposit is due before the loan is paid out? Must an order be placed before final funding approval is given?

Resolve these conflicts in advance through coordinated deadlines, suitable contractual conditions or bridging finance that is genuinely available. Verbal assurances are no substitute for this coordination. Sharing experiences with others in the franchise network can also reveal common funding bottlenecks, but it does not replace an individual credit assessment.

Practical takeaway: Sign only when your funding needs, binding finance commitments and payment dates align — or when an agreement reviewed by a lawyer protects you if the financing fails to materialise.