Buying a franchise: agree a financing contingency clause

You have found a franchise that fits your plans, but the bank has not yet given final approval. Can you sign anyway? Enthusiasm matters in franchising, but it is no substitute for certainty over funding. A financing contingency clause can prevent you from being tied to commitments you cannot afford. To do that, however, it must be tailored precisely to both your funding application and your franchise agreement.

1. Distinguish statutory protection from your own financing clause

The Netherlands has a Franchise Act, set out in Title 16 of Book 7 of the Dutch Civil Code, Articles 7:911 to 7:922. Among other things, it requires franchisors to provide information about fees, investments and other financial contributions before an agreement is concluded. This helps you support your funding application.

Once the legally required information has been provided, a standstill period of at least four weeks applies. During this period, the franchisor must not, among other things, enter into a franchise agreement or require franchise-related payments or investments. For franchisees established in the Netherlands, these statutory protections cannot be varied to their disadvantage.

This protection does not automatically give you a financing contingency clause. Once you have signed, a bank's rejection of your application does not, in itself, allow you to withdraw from the contract. You must agree a financing contingency clause separately. Alongside the Franchise Act, the general rules of contract law are relevant here.

Discuss the clause before the final version of the contract is settled. Use the statutory information period to prepare your application, rather than assuming it guarantees that funding will be available.

2. Decide what happens while financing is outstanding

A financing contingency clause can take different legal forms. Two common options are a suspensive condition and a resolutive condition. The distinction has important practical consequences.

• Suspensive condition: the agreed obligations only take effect if financing is obtained. Specify which obligations do not yet apply and which, if any, apply immediately.
• Resolutive condition: the agreement takes effect immediately, but can come to an end under the agreed terms if financing is not obtained. Giving notice on time and providing the required supporting documents may be decisive.

Ask a lawyer specialising in franchise law to assess which approach suits your situation. Simply adding the words ‘subject to financing’ above your signature does not provide enough clarity.

Also agree what may happen before the funding decision is made. Can the franchisor order equipment or reserve a place on a training course, for example? Who bears those costs if funding falls through? Avoid a situation where the clause offers protection on paper while irreversible commitments are being made separately.

3. Specify the amount, terms and evidence required

An effective clause makes it possible to assess objectively whether financing has been obtained. Set out at least the following points:

• The amount required: how much must be financed externally, and what contribution from your own funds has been agreed?
• The type of financing: does only a business loan qualify, or can leasing, a credit facility or a combination also count?
• Acceptable terms: what limits apply to interest rates, the financing term, repayments and any security required?
• What counts as approval: is an indicative offer sufficient, or do you need a firm offer with conditions you can meet?
• The deadline: when must financing be in place, and by when must you give notice that you are invoking the clause?
• Required efforts and evidence: which applications must you submit, and which rejection letters or other documents must you provide?

Pay particular attention to an offer that formally approves funding but depends on an unaffordable contribution from your own funds or personal security you are unwilling to provide. If the contract refers only to ‘obtaining financing’, there may be a dispute over whether such an offer is sufficient.

Do not commit to providing rejection letters from several lenders without first discussing this. Ask your finance adviser whether that evidence requirement is realistic within the time available. You must actually be able to make the agreed efforts.

4. Agree how matters will be settled and monitor the deadline

State explicitly what happens if you validly invoke the clause. Do all relevant obligations end? Will any payments already made be refunded? Will you remain liable for certain advisory or preparatory costs specified in advance? Do not leave this to the assumption that the parties will work something out later.

Also check separate agreements covering matters such as fixtures and equipment, leasing or the purchase of an existing outlet. A clause in the franchise agreement does not automatically apply to contracts with other parties. Align the conditions and deadlines before taking on commitments.

Keep a single file containing your application, any follow-up questions from lenders, and all offers and rejections received. Put the notification deadline in your diary well in advance. When invoking the clause, follow the agreed procedure exactly, including the recipient, method of delivery and supporting documents.

Is the assessment taking longer than expected? Request a written extension before the deadline expires and make sure the other party agrees to it. Sending an extension request alone does not secure an extension.

Practical takeaway: only sign once it is clear what financing outcome is required, how you must demonstrate that it has not been achieved, and which obligations will then cease to apply. A specific, well-drafted clause offers better protection than a reassuring promise that the funding will probably come through.