Buying a Franchise in Lebanon: Using the Business as Security to Finance Your Outlet

When you buy a franchise in Lebanon, a lender may ask for security over the business you will operate. It is not enough to ask about the loan amount and its cost: you need to understand exactly what you are pledging, and what you are entitled to offer as security in the first place. Joining a franchise network gives you specific rights to use its brand and operate its business model, but it does not make you the owner of the brand or every asset on which the outlet depends.

1. Distinguish the business from the company and the property

The business, or commercial establishment, is not the same as the company that owns it or the property in which it operates. It is a collection of assets and rights used to carry on commercial activity, which may include tangible and intangible elements depending on the circumstances. Taking security over the business therefore differs from taking security over shares in the company or over a property. These arrangements should not be treated as interchangeable documents with identical effects.

Start with a list showing what the operating company owns, what it leases and what it uses under licence. Include equipment, furniture, stock, rights relating to the premises, the trading name and rights to use operating systems. Do not assume that all these elements automatically fall within the security; ask your lawyer to establish the scope permitted by law and supported by the documents.

Create a table recording the following for each item:

• Its legal owner, with documentary evidence of ownership or the right to use it.
• Any existing finance or supplier retention-of-title arrangement.
• Restrictions preventing it from being pledged or transferred without consent.
• Whether, and to what extent, it would remain available if the franchise agreement ended.

If, for example, a key machine is leased from the franchisor, do not present it to the lender as an asset you own. Equally, the right to use a trade mark is not ownership of that mark, nor does it mean you can sell that right independently of the contract’s terms.

2. Align the security with the franchise agreement before accepting finance

Read the draft finance documents alongside the franchise agreement. One may allow the lender to enforce its security over the business, while the other requires the franchisor’s consent to a transfer of operations or a change of control. A verbal promise that the parties will reach an understanding later does not resolve this conflict.

Ask whether granting the security itself requires the franchisor’s consent, and whether that consent extends to subsequent enforcement action or merely permits the security to be granted. A franchisor’s acceptance of the security does not necessarily mean it will accept any buyer or operator who takes your place.

Where necessary, discuss a written arrangement between the parties addressing specific questions: will the lender be notified of a breach that threatens the continuation of the franchise? Can it be given an opportunity to clear specified arrears without automatically becoming the franchisee? What conditions must a qualified replacement operator meet? Your lawyer should review whether these arrangements are enforceable, rather than relying on general commercial agreement.

Pay attention, too, to the valuation used by the lender. The outlet’s value while trading under the brand may differ from its value after losing the right to use it. Ask for the valuation assumptions to be explained, and do not base your borrowing on the continued availability of rights that the franchisor can terminate under the agreement.

3. Understand registration and the Lebanese rules governing security

Lebanon has no comprehensive franchise-specific law or statutory franchise disclosure regime. The relationship is governed primarily by the Code of Obligations and Contracts, with the Commercial Code and other relevant rules applying according to the nature of the transaction. Describing an arrangement as a ‘franchise’ therefore does not exempt you from security formalities or give you automatic protection against creditors.

Legislative Decree No. 11 of 11 July 1967 governs matters relating to commercial establishments, including the granting of security over them. The Ministry of Justice explains that there is a special register for commercial establishments within the Commercial Register, and highlights the importance of publicising contracts and transactions affecting third parties. Signing alone is no substitute for checking the registration required to make a transaction effective against third parties.

Instruct your lawyer to obtain the appropriate registry extracts and examine existing entries before you commit. Ask them to confirm how the security must be created and registered, which assets and rights it covers, the effect of any prior security, and the documents and consents required. Do not assume that a bank’s valuation of the assets proves they are free from third-party rights.

The Lebanese Franchise Association’s Code of Ethics, which addresses the provision of material information before a commitment is made, is neither a general disclosure law nor a system for registering security. Reviewing finance documents and legal restrictions remains a separate task from assessing the brand.

4. Calculate the cost of the security and establish how it will be released

Do not reduce the cost of finance to interest alone. Ask for a written breakdown of valuation, legal review and registration fees, along with any costs associated with amending the security or removing its registration. Establish who pays these costs and when they fall due, particularly if the franchise transaction ultimately does not go ahead.

Review the definition of the secured debt as well. Is it limited to the outlet’s loan, or does it cover other current or future obligations to the same lender? Negotiate a clear and proportionate scope, and ask how the security affects your ability to sell or replace old equipment in the ordinary course of business.

Agree what document will confirm repayment, who will handle the release of the security and removal of the registry entry, and the deadline for doing so. If the franchisor’s consent or completion of registration is a condition of funding, co-ordinate these requirements with the date on which franchise fees become payable. This will help you avoid paying a non-refundable sum before confirming that the loan will be available.

Practical takeaway: Before granting security over the business, obtain a clear ownership schedule, a review of registered entries, written confirmation that the finance and franchise arrangements are compatible, and a plan for releasing the security after repayment. Do not pledge rights beyond those you actually hold.