Buying a franchise: make the agreement conditional on securing finance

A positive conversation with the bank is not the same as having funds available. When you buy a franchise, the franchisor may want your signature before the bank has made its final decision. You therefore need to understand what happens if the finance falls through. A franchise relationship involves two independent businesses, and you remain responsible for securing your own finance, however established the concept may be.

Distinguish the bank’s interest from a final decision

Start by asking the bank to clarify how far your finance application has progressed. An initial indication may still be subject to a credit assessment, your own capital contribution, security or further documentation. Even an approved loan may have conditions that must be met before the funds are released.

Ask for written answers to the following questions:

• Is the lending decision final, or are further assessments required?
• What documents does the bank need, and must the franchise agreement be signed?
• What conditions must be met before the funds are released?
• How long is the offer valid?
• When could the money actually be in the business’s account?

Then compare the bank’s timetable with the franchisor’s requirements. If the agreement requires payment before the bank can release the funds, there is a funding gap, even if the loan has been approved in principle.

Check both your entitlement to the loan and whether the funds can be released in time. These are two separate questions. Also ask the bank to confirm whether it can make its lending decision on the basis of a franchise agreement that includes a financing condition. This may allow the process to move forward without you having to bear all the risk.

Negotiate a clear financing condition

A financing condition is a negotiated contractual provision, not something you should assume applies automatically. Its purpose is to establish what happens if the necessary finance is not secured. For example, it could provide that certain obligations do not take effect until finance is in place, or give you the right to withdraw from the agreement in specified circumstances.

These options have different consequences. Have a lawyer with franchise expertise draft the condition rather than settling for a general statement that the agreement is ‘subject to finance’.

The condition should provide clear answers on:

• Scope: What finance needs to become available, and for which business?
• Acceptable terms: What requirements can you accept, for example regarding your own capital contribution and security?
• Deadline: By when must the finance be secured?
• Your responsibilities: What applications and supporting documents must you submit?
• Notification: How and when must the franchisor be told the outcome?
• Consequences: What happens to the agreement and any sums already paid if finance is not secured?

Also specify what happens if the bank approves only part of the amount. An offer that does not cover the agreed funding requirement should not be left open to differing interpretations by the parties.

Consider specifically whether failure to secure finance must be evidenced by written confirmation from the bank. Any such requirement must be practical to meet within the deadline.

Align the condition with other binding commitments

A well-drafted financing condition in the franchise agreement does not automatically protect you from obligations under other contracts. You may still be bound by orders, a lease or consultancy contracts you have entered into separately.

Make a simple list of all commitments planned before the financing decision. Record the other party, the signing date, the first payment date and the cost of cancellation. Flag any contracts that need their own conditions or should be postponed.

For example, you might be entitled to withdraw from the franchise agreement if the bank turns you down, but have already ordered equipment without an equivalent right to cancel. In that case, the equipment purchase may remain binding even though the franchise launch does not go ahead.

Also agree which preparations may begin while you wait. If the franchisor is to order materials or book training on your behalf, it must be clear who bears the cost if the finance falls through. Do not accept undefined liability for ‘costs incurred’. Ask for any obligation to reimburse costs to be clearly limited and documented.

Understand the protections available in Sweden before signing

Sweden has specific legislation: the Act (2006:484) on Franchisors’ Duty to Provide Information. It requires franchisors to provide clear, understandable written information about the agreement’s implications and relevant circumstances in good time before the agreement is entered into. This information must cover fees and other financial terms, among other matters.

However, the Act does not give you an automatic right to withdraw from a franchise agreement because the bank refuses a loan. Nor does it guarantee finance or profitability. The binding effect and interpretation of the agreement are also assessed under general contract law, in which the Swedish Contracts Act plays a central role.

Ask your lawyer to review the financing condition alongside the payment provisions and the rules governing when the agreement takes effect. In particular, check that other wording does not make you liable to pay even if the financing condition has not been met.

Practical conclusion: Do not sign with finance as an unspoken assumption. Get the bank’s terms in writing, agree what a refusal means and avoid separate commitments you cannot afford without the loan.