Buying a franchise with business partners: what should you agree in advance?

Joining a franchise network with a business partner can mean sharing the investment and bringing different experience to the business. However, a joint venture rests on two relationships: the agreement with the brand and the agreement between the owners. If one of you works in the business while the other mainly provides funding, you need to establish before buying who can make which decisions, what each person is paid for and what happens if your plans later diverge.

1. Separate ownership from operational responsibilities

Start by setting out exactly who will join the franchise network. Will the franchise agreement be signed by a company you set up together, or by one partner’s existing business? Who will pay the initial franchise fee, who will employ the staff and who will be the designated contact for the brand? These points should be recorded, not simply discussed at an introductory meeting.

An ownership stake is not a job description. The responsibilities, availability and cover arrangements for the partner running day-to-day operations need to be agreed separately. You should also distinguish payment for work from returns on ownership: a managing director’s fee or salary is not the same as a dividend.

Draw up a shared responsibilities table covering the following for each owner:

• their financial and non-financial contributions;
• their agreed daily or weekly duties;
• their decision-making and signing authority;
• the basis on which they will be paid for their work;
• arrangements for cover during a prolonged absence.

Ask the franchisor whether it requires an owner to be personally involved in the business or requires prior approval of the appointment of a business manager. A plan built around passive investment will not work if the brand specifically expects an owner-operated outlet.

2. Allocate future funding needs, not just start-up capital

Do not stop at agreeing who will pay how much before opening. Your joint budget should identify capital expenditure, opening stock and working capital reserves separately. Then discuss what happens if revenue takes longer to come in or the opening is delayed.

Clarify the legal basis for every payment into the business. An equity contribution and a loan from an owner carry different rights, repayment options and risks. An approach of ‘I’ll pay now and we’ll sort it out later’ can easily lead to disputes, particularly if only one owner can provide additional funds.

Your owners’ agreement should set out when further funding can be requested, who approves it and the deadline for making a decision. Also specify what happens if one party cannot or will not contribute. Ownership percentages do not change simply because someone transfers more money to the business.

For a Hungarian limited liability company (Kft.), any provision for supplementary contributions and the conditions attached to them must comply with the company’s articles of association and the Hungarian Civil Code. Work with an accountant and a lawyer to choose the right approach; an informal promise between owners is no substitute for the necessary company resolutions.

3. Make sure the three contractual documents work together

Hungary has no standalone law covering every aspect of franchising, but franchising is not unregulated: Act V of 2013, the Hungarian Civil Code, contains specific provisions on franchise agreements. General contract and company law provisions also apply. Nor is there a generally mandatory US-style franchise disclosure document.

When buying together, you need to review three documents alongside one another: the franchise agreement, the company’s constitutional document and the separate agreement between the owners. The last of these does not automatically override the other two, nor does it bind the franchisor in its own right.

For example, agreeing that either of you may freely sell your ownership stake will not be enough if the franchise agreement requires prior consent to a change of ownership. Likewise, an internal division of responsibilities does not release the company signing the agreement from its obligations to the brand.

During the legal review, specifically identify:

• which decisions require joint approval by the owners;
• which matters the managing director can decide independently;
• how often you will receive financial reports;
• which changes must be reported to the franchisor;
• when the brand’s prior written consent is required.

Also ask your lawyer to check how internal approval limits affect dealings with third parties. A failure to follow an internal decision-making rule does not necessarily mean that a contract signed on the company’s behalf will be ineffective against a third party.

4. Test your agreement against difficult situations

Before signing, work through some realistic scenarios. One owner is unable to work for several months. You need a new business manager but cannot agree on whom to appoint. One of you wants to open another outlet, while the other would prefer a dividend. Where voting rights are equal, decision-making deadlock is a particularly important risk.

Set a deadline for discussions and agree in advance what steps will follow if you cannot reach agreement. This might involve bringing in an external expert on a financial issue or using a mediator to help resolve a dispute between owners. The process should not obstruct essential day-to-day operations.

An owner’s exit requires a separate valuation procedure, payment schedule and handover arrangements. Align these with the rules on transferring ownership interests and any approval rights the franchisor may have. An owner leaving does not necessarily bring the business’s franchise relationship to an end.

Practical takeaway: before buying together, put your responsibilities, financial commitments and decision-making arrangements in writing. Only commit to the brand once this plan is consistent with both the company documents and the franchise agreement.