Launching a franchise: which company should be the franchisor?

When expanding a successful business into a franchise network, one question soon arises: should the existing business enter into contracts with franchisees, or is it worth setting up a separate company? This is not simply an accounting matter. The decision determines who is entitled to license the brand, who provides support, who issues invoices and who is responsible for delivering on commitments. Before recruiting your first franchisee, you therefore need to establish which entity will act as the franchisor and what it will actually do.

1. Map out the roles before setting up a company

In an established business, it may seem natural for everything to revolve around the founder. Legally, however, the brand, the premises lease, the employees and the supplier relationships do not necessarily sit with the same person or company. Matters that can be handled through internal coordination in your own outlet may create uncertainty over delivery when a franchisee is involved.

Map out at least the following roles:

• who operates the proven business;
• who owns the trade mark and who holds the operational know-how to be shared;
• who employs the staff providing training and support;
• who has the assets and contractual rights needed to deliver the franchise package;
• who receives franchisee fees and who bears the associated costs.

For each role, identify the actual legal person or entity, rather than simply using the shared brand name. Members of a franchise network contract with individual businesses, not an informal group of companies.

The key question: will the designated franchisor be able to fulfil every commitment to franchisees, either in its own right or through appropriate contractual arrangements?

2. Use the existing business or a separate franchisor company?

One advantage of using the existing business is that operational experience, staff and revenue may already be in one place. Fewer internal agreements are needed, and it is easier to demonstrate the business operation behind the franchise offer. The downside is that the day-to-day demands of company-owned outlets and support for franchisees draw on the same resources.

A separate franchisor company can make it easier to distinguish the revenue and costs associated with services to franchisees. This can also help clarify management responsibilities and bring in an investor later. However, a new company does not automatically acquire the existing business’s experience, rights or staff. Arrangements must be made for their use and availability.

For example, if one company operates the pilot outlet but another will act as the franchisor, you need to clarify the terms on which the outlet can be used for franchisee training. Who organises the training, who pays for the trainers’ time, and how will access be secured if a dispute arises between the owners?

Do not assume that a separate company automatically removes risk. Liability depends on the legal form, any guarantees or security provided, the contracts and how the business operates in practice. It is worth developing the structure with a lawyer and an accountant.

3. Align legal rights with the ability to deliver

Hungary has no standalone, comprehensive franchise act, but it would be incorrect to say that franchise agreements are entirely unregulated. Act V of 2013 on the Civil Code expressly addresses franchise agreements in Sections 6:376–6:381. General contract rules also apply, including duties to cooperate and provide information.

There is no general requirement for regulatory registration specifically for franchise systems, nor a mandatory-format pre-contractual disclosure document. This does not replace ordinary business registration obligations or remove the need to obtain any licences required for the activity. A code of ethics is not legislation; whether it applies must be assessed in light of membership obligations and contractual commitments.

When choosing the franchisor, a clear chain of rights is particularly important. If the trade mark belongs to another company or to the founder personally, the franchisor needs appropriate rights to use it. The agreement must also cover the right to license its use to franchisees. The trade mark law framework is set out in Act XI of 1997.

Similarly, check whether the franchisor can lawfully make the operational know-how and training materials available. Common ownership alone does not provide the necessary rights.

4. Test your ability to deliver before the first agreement is signed

Take a proposed commitment to a franchisee and trace how it will be fulfilled. If, for example, the franchisor promises on-site support for an opening, identify the person responsible, their employer, the basis on which they will be available and who will bear the cost. Repeat this exercise for training, ongoing assistance and use of the brand.

Prepare a short internal checklist covering: the commitment to the franchisee, the organisation delivering it, the contractual arrangements, who bears the cost and the fallback arrangement. Resolve any gaps before signing the franchise agreement. If related companies invoice one another, have the tax implications and any transfer pricing requirements reviewed as well.

The franchisee must be able to see clearly which business they are contracting with and which entity they can hold to its obligations. If you set up a new company, do not present the existing business’s results as the new company’s own track record: explain the relationship accurately.

Practical takeaway: choose the franchisor not because it is the easiest company to name, but because it can serve the franchise network with verifiable rights, secured resources and clear accountability.