Buying a Franchise with an Investor: What to Agree in Advance

Buying a franchise with an investor allows you to share the initial investment, but adds another layer of agreements: alongside your relationship with the franchisor, you take on obligations towards a business partner. Joining a franchise network does not, in itself, protect you from disputes between owners. Before paying for the franchise, agree on who provides the money, who runs the outlet and what happens if funds run short or the investor wants to leave.

1. Define what the investor gets for their money

The word ‘investment’ does not explain the legal structure of a deal. Money may be provided as a loan to the company, a contribution to an increase in its share capital, or payment to an existing owner for their stake. Each has different consequences: a loan generally requires repayment on agreed terms, an equity investment confers rights as a shareholder, and buying an existing stake does not, in itself, put money into the outlet’s budget.

Start by mapping the flow of funds. For each amount, specify the recipient, purpose, payment deadline and supporting legal document. It is particularly important to distinguish money used to buy a stake from the founder from funds earmarked for the initial franchise fee, refurbishment, stock and operating expenses.

Discuss four questions:

• Will the investor receive an equity stake, the right to repayment of a loan, or a combination of both?
• Who will fund preparatory expenses before the franchise agreement is signed?
• What conditions must be met before the investor is obliged to release the next instalment?
• What happens to money already transferred if the deal with the franchisor falls through?

Do not promise a shareholder an unconditional monthly ‘return’ instead of establishing a clear payment mechanism. Profit distributions by a Russian limited liability company (OOO) are governed by law, not simply by agreements between partners. Loan interest and payments to shareholders out of profits are different obligations and must be accounted for separately in the budget.

2. Align the investment deal with the franchise agreement

In Russia, commercial concession agreements are specifically governed by Chapter 54 of the Civil Code of the Russian Federation. These agreements grant a package of exclusive rights, including the right to use a trade mark. The agreement must be in writing, and the grant of rights must be registered with Rospatent under Article 1028 of the Civil Code. Without registration, the rights are deemed not to have been granted.

If the franchisee is an OOO, the company itself is the party to the agreement and bears the obligations it imposes. An investor who acquires a stake in the OOO does not gain an independent right to use the brand in another business.

Check whether the draft agreement contains requirements concerning shareholders, changes of control, the company’s director or the founder’s personal involvement. For example, the franchisor may expect the approved partner to run the outlet personally, while the investor intends to appoint a different director immediately. It is better to identify this conflict before committing funds.

Ask a lawyer to cross-check three sets of documents: the franchise agreement, the company’s corporate documents and the financing agreements. If the proposed transaction requires the franchisor’s consent under the agreement, obtain it in the required form before completing the transaction.

Russia has no specific mandatory format for pre-contractual franchise disclosure. Your investment decision should therefore not depend solely on receiving a presentation: agree in advance which documents and due diligence findings must be available before any money is transferred.

3. Separate management, remuneration and profit

A common source of disagreement is differing expectations about each partner’s involvement. The founder believes they should be paid for their day-to-day work, while the investor sees any payments to the founder as a premature withdrawal of profits.

Distinguish between three roles: shareholder, director and lender. One person may hold all three, but the legal basis for each payment will differ. The director’s remuneration should be documented separately from profit distributions and loan repayments.

An OOO is governed by the Civil Code and Federal Law No. 14-FZ ‘On Limited Liability Companies’. Arrangements for exercising shareholder rights can be set out in a shareholders’ agreement, subject to Article 67.2 of the Civil Code. However, this does not replace the company’s charter or the necessary resolutions of its governing bodies.

Before proceeding with the deal, draw up a list of matters requiring the partners’ approval:

• approving the budget and expenditure above agreed limits;
• taking on new credit facilities or loans, and providing security for third-party obligations;
• appointing the director and setting their remuneration;
• opening additional outlets;
• distributing profits and entering into related-party transactions.

At the same time, define the limits of the director’s authority to act independently. If the investor must approve every purchase, the outlet risks failing to meet the franchisor’s operational requirements. A more practical approach is to define permitted expenditure within the approved budget and set response deadlines for requests outside those limits.

4. Plan for funding shortfalls and the investor’s exit

A promise to ‘put in more if needed’ is not the same as a binding commitment to fund the business. Agree on each partner’s maximum contribution, the investment schedule and the procedure for deciding on additional funding. Specify whether that funding will take the form of a loan or an equity contribution, and what may happen if a partner declines to participate.

Review the investor’s exit arrangements separately. The sale of a stake is governed by law and the company’s charter; pre-emption rights, consent requirements and notarisation requirements may apply. Do not promise the investor an unrestricted right to sell to any buyer without checking these restrictions and the terms of the franchise agreement.

Discuss how the stake will be valued, payment deadlines and what will happen to any outstanding loan. Selling a stake does not automatically extinguish loan claims or release someone from a personal guarantee: these matters must be addressed separately.

Also agree on a procedure for resolving voting deadlocks. Even equal ownership does not guarantee agreement: without an effective dispute-resolution mechanism, the partners may block approval of the budget or the appointment of a director.

Practical takeaway: before buying a franchise, agree on a coordinated set of documents covering funding, management and the investor’s exit. These should enable the company to fulfil its obligations to the franchisor without relying on verbal promises between partners.