Buying a US Franchise with a Business Partner

Buying a US franchise with a partner can bring complementary skills and shared investment. It can also create two sets of obligations: those between the owners and those owed to the franchisor. Before joining a franchise community together, make sure your ownership arrangements work under both. A friendship, shared ambition or equal investment is not a substitute for a written agreement.

1. Check who the franchisor is actually approving

Start by identifying the proposed franchisee. Will the franchise agreement name an individual, a limited liability company or another entity? Who will own that entity, and who must receive the franchisor’s approval?

Do not assume that approval of one applicant automatically covers their business partner. Ask the franchisor to confirm:

• Which owners must submit applications and financial information.
• Whether particular owners must complete training or manage the business.
• Whether it requires a designated controlling owner or operating principal.
• Which changes in ownership percentages require consent.
• Whether admitting a new investor triggers approval requirements or fees.

Read the Franchise Disclosure Document (FDD), particularly Item 15 on participation in operating the business and Item 17 on matters including transfer. Then check the agreement itself. These disclosures help identify restrictions, but your proposed partnership must fit the binding documents.

For example, an arrangement in which both owners expect to remain passive may be incompatible with a brand that requires an approved owner to direct operations. Resolve that mismatch before committing funds.

2. Separate ownership, work and financial contributions

An equal ownership split does not necessarily mean equal workloads, equal pay or equal future contributions. Record each separately rather than relying on a general promise to share everything fairly.

Ask a US lawyer to prepare the appropriate owners’ agreement: for example, an LLC operating agreement or a shareholders’ agreement. With your accountant, document:

• Initial funding: what each owner contributes, when it is due and whether it is equity or a loan.
• Working roles: responsibilities, expected availability and authority to hire or spend.
• Remuneration: how working owners are paid, separately from profit distributions.
• Additional funding: how future cash needs will be approved and shared.
• Financial visibility: access to bank accounts, accounts and management reports.

Pay particular attention to further funding. If the business needs more cash and only one owner can contribute, will that contribution become a loan or change the ownership split? Either approach needs proper documentation and may require franchisor consent.

Model a period with no distributions to owners. Each partner should understand how they will cover personal expenses without assuming that business cash is available to withdraw.

3. Agree how decisions and disagreements will work

A franchise business cannot pause required payments while its owners argue. Your internal agreement should distinguish routine decisions from matters requiring both owners’ consent.

You might authorise an operating partner to make purchases within an agreed budget while reserving borrowing, major expenditure and distributions for joint approval. Whatever you choose, ensure someone can act promptly to meet the franchise agreement’s obligations.

An equal voting split needs a deadlock procedure. Discuss an escalation meeting, mediation and, where appropriate, a carefully drafted buyout mechanism. Avoid adopting a standard buy-sell clause without considering whether both partners could realistically finance a purchase.

Plan for illness, death, divorce and a partner wanting to stop working. An internal right to buy another owner’s interest does not necessarily give you the right to complete that transaction without franchisor approval. The owners’ agreement and franchise transfer provisions must work together.

4. Apply disclosure protections to the joint purchase

The Federal Trade Commission’s Franchise Rule requires a franchisor to provide its FDD at least 14 calendar days before a prospective franchisee signs a binding agreement with, or pays money to, the franchisor or its affiliate in connection with the proposed franchise sale. The FDD contains 23 disclosure items. This is a review period, not government endorsement of the opportunity.

Some states also impose franchise registration or disclosure requirements, and state relationship laws may affect particular contractual rights. Separately, state entity and contract laws govern much of the relationship between co-owners. Have your lawyer identify which requirements apply to your purchase and proposed entity.

Arrange for both partners to review the complete FDD and proposed contracts. If ownership or the purchasing entity changes during negotiations, ask your lawyer whether updated documentation or further disclosure steps are necessary. Partners with different financial exposure or objectives may also need separate legal advice.

Practical takeaway: Before signing, agree who owns, who works, who pays and who decides. Then have those arrangements checked against the franchise agreement so that an internal promise does not conflict with an obligation to the franchisor.