Buying a franchise: check who you are contracting with

A well-known brand may have several companies behind it. The company recruiting you is not necessarily the one that signs the franchise agreement or provides support. Franchising brings independent business owners together, but your rights must be tied to the correct legal entity. Before buying a franchise, you should therefore establish exactly who is promising what – particularly if the franchise system operates through a Swedish master franchisee.

1. Identify the company signing the agreement

Start with the first and last pages of the agreement. These should identify the legal entity acting as franchisor, including its full company name and Swedish company registration number or equivalent foreign identifier. Check these details against up-to-date company registry records and verify that the signatory is authorised to represent the company.

Distinguish between the brand, the corporate group and your contractual counterparty. The fact that an international parent company is presented at a sales meeting does not, in itself, make that parent company responsible for a Swedish subsidiary’s obligations. The same applies if a recruitment consultant or another group company has handled your enquiries.

Ask for a simple company structure chart showing:

• which company you will enter into the franchise agreement with,
• which company has the right to license the franchise system to you,
• which companies will receive your payments,
• which companies will provide the agreed services.

If the payment recipient is not your contractual counterparty, you should receive a clear explanation and payment instructions. This is not necessarily a problem, but you should understand which payment obligation you are settling and who you can bring a claim against if something is not delivered.

2. Understand the master franchise chain

Under a master franchise arrangement, a company receives the right to develop a franchise system within a territory and grant franchises to other business owners. You may therefore become a sub-franchisee of the Swedish master franchisee, without having a direct franchise agreement with the international owner of the franchise system.

This adds another contractual layer. Your business may depend on a master agreement to which you are not a party. The question is therefore not simply whether your counterparty has the right to grant you a franchise today, but also how that dependency will be managed throughout the term of your agreement.

Ask for written answers to the following questions:

• Does the master franchisee have the right to grant a franchise for the specific business and territory being offered to you?
• How does the remaining term of the master agreement compare with the term of your agreement?
• What happens to your agreement if the master agreement ends or is not renewed?
• Is there a documented option to continue directly with the owner of the franchise system or with a new master franchisee?

You do not automatically have the right to see the entire master agreement. If confidentiality prevents disclosure, you can request relevant extracts or confirmation from the owner of the franchise system. Have an independent lawyer assess whether the documents genuinely substantiate the rights being offered.

An assurance that the owner of the franchise system ‘usually looks after franchisees’ is not the same as a binding commitment to continue working with you.

3. Assign every obligation to a responsible party

When several companies are involved, responsibility can become unclear. The Swedish franchisor may sell you the franchise, while training is arranged by a company abroad and ongoing advice is provided by a regional partner.

Create a responsibility table with four columns: agreed service or deliverable, responsible contractual party, actual provider, and contact point if something goes wrong. Include everything essential to opening and running your business.

Then check whether the franchisor remains responsible to you when someone else carries out the work. Avoid an arrangement in which the franchisor refers you to the supplier, while the supplier says you have no contract with it.

If another group company’s resources are crucial to your decision to buy, your lawyer should examine whether a separate commitment from that company is needed. A shared brand or common ownership is no substitute for this scrutiny.

Test a specific scenario too: the Swedish master franchisee loses its rights halfway through your agreement. Who will then provide support, receive payments and decide whether you can remain in the franchise network? A clear answer must be supported by agreements that actually bind the parties concerned.

4. Use the pre-contract disclosure requirements

Sweden has an Act on Franchisors’ Duty to Provide Information (2006:484). Well before an agreement is entered into, the franchisor must provide clear, comprehensible written information about what the agreement entails and any other matters that need to be disclosed in the circumstances. In a sub-franchise arrangement, the master franchisee must provide this information to its prospective franchisee.

The Act’s minimum requirements cover, among other things, the intellectual property rights being licensed, the term of the agreement and the conditions governing its termination. You should therefore ask for any significant dependencies on the master agreement to be explained before you sign. The disclosure duty does not, however, automatically make the owner of the franchise system responsible for the master franchisee’s promises.

Sweden has no special registration requirement solely because a company operates a franchise business. Ordinary company registration is therefore not official approval of the franchise arrangement. Contractual matters are also assessed under general legal rules, including the Swedish Contracts Act.

Practical takeaway: Do not sign until you can name your contractual counterparty, trace the chain of responsibility and understand what happens if an intermediary drops out. Have a franchise lawyer review any gaps before you commit capital.