Buying an existing franchise: what to check before you commit

Buying an existing franchise can let you start with customers, staff and premises already in place. But a resale can also come with obligations that are not mentioned in the advert. In Brazil’s franchise market, a change of ownership requires more than agreeing on a price: you need to understand what you are buying, verify the business’s performance and confirm the conditions for continuing to use the brand.

1. Establish exactly what is being sold

“I’m selling my franchise” can refer to different legal transactions. The seller may be offering shares in the company that operates the outlet, or particular assets and rights associated with the business. This distinction affects both the risk assessment and the documentation required.

When you buy shares, the legal entity remains in existence, along with its history of obligations. Buying the business or its assets can also expose you to liabilities inherited from the previous operator, depending on the structure and circumstances of the transaction. Do not assume that setting up a new company with a different CNPJ — Brazil’s corporate tax registration number — removes responsibility for earlier liabilities.

Ask for a written list of what the purchase includes, covering:

• Furniture, equipment and stock, stating who owns them and their condition.
• Rights relating to the business premises and the conditions for remaining there.
• Contracts intended to be transferred or terminated.
• Outstanding receivables, customer prepayments and outstanding obligations.
• Assets that are leased, financed or owned by the franchisor.

Appoint a lawyer and an accountant to assess the proposed structure before agreeing to a deposit. You can only assess the asking price once its components are clear.

2. Confirm the franchisor’s approval and check the documentation

An agreement with the seller does not, by itself, give you the right to operate under the brand. Check the transfer rules, the criteria for approving a buyer and any training requirements. Ask whether the existing franchise agreement will be assigned to you or whether you will sign a new agreement with different commercial terms.

Law No. 13,966/2019, Brazil’s current Franchise Law, replaced Law No. 8,955/1994. It requires the franchise disclosure document, known as the Circular de Oferta de Franquia or COF, to set out any rules on transfer or succession. Compare this information with the outlet’s current agreement and the proposal presented to you.

As an incoming franchisee, request an up-to-date COF. The law requires it to be provided at least ten days before you sign a franchise agreement or preliminary agreement, or pay any fee to the franchisor or a person or company connected to it. Do not interpret this waiting period as permission to make advance payments to the seller without legal review.

Obtain formal approval from the franchisor and clarify who will pay any transfer fees, training costs and costs of bringing the outlet up to the brand’s standards. Do not treat the resale as complete while these conditions remain unresolved.

3. Check that the outlet’s financial performance can be verified

A busy outlet does not necessarily generate enough cash to provide a return for the buyer. Request records covering a sufficiently long period to reveal seasonal patterns and fluctuations, rather than basing your decision solely on the best months.

With an accountant’s help, cross-check sales reports against tax documents, bank statements and receipts from card payments and payment platforms. Any discrepancies need a documented explanation, not just a verbal assurance.

Then recalculate the financial results, taking account of the costs needed to keep the business running: premises, staff, taxes, purchases, contractual fees and maintenance. Check whether the figures also include payment for the owner’s work. Results that depend on unpaid labour may not be achievable under your ownership.

Separate recurring revenue from one-off items. Check discounts, cancellations, returns and sales for which payment has not yet been received. Ask why the outlet is being sold and test whether the explanation is consistent with the documents. Persistent refusal to provide essential records is a reason to put negotiations on hold.

4. Investigate obligations that may come with the purchase

Carry out due diligence on tax, employment, trade and contractual liabilities. Clearance certificates are useful, but they are no substitute for reviewing records and contracts: obligations that have not yet been pursued may not appear on them.

Check payments to the franchisor, outstanding amounts owed to employees, suppliers and the landlord, and any legal proceedings involving the company. Establish whether any equipment has been pledged as security or still has purchase instalments outstanding.

Also examine commitments to customers, such as prepaid packages, credits and services sold before the transfer but due to be delivered afterwards. The seller may already have received the money, while the new management will bear the cost of fulfilling those commitments.

Ask for written confirmation of any refurbishments or upgrades required by the brand. An operating outlet may need immediate investment to secure approval for the transfer.

5. Make completion conditional on essential checks

The purchase agreement should identify what is being bought, the price, payment terms and each party’s responsibilities. With legal advice, set conditions for completion, such as the franchisor’s approval, satisfactory documentation for the premises and clarification of any outstanding issues identified.

Also agree a cut-off date for allocating income and expenses, a physical check of the assets and the handover of authorised access credentials. Indemnity clauses between buyer and seller do not necessarily prevent third parties from pursuing claims.

Practical summary: before paying for an existing franchise, verify three things: what you will receive, which obligations you may take on and the conditions under which the franchisor will approve you. Only then should you negotiate the final price.