Buying a Franchise: Check Equipment Ownership and Security Interests

When you buy an existing franchise, the premises may be full of equipment that the seller uses but does not own outright. Coffee machines, refrigeration units, computers and other equipment may be leased, borrowed or used as security for debt. Before paying for a ready-to-operate business within a franchise network, you should therefore check who owns each item and what rights others have over it.

1. Draw up an equipment list with evidence of ownership

Start with a detailed list of the equipment included in the purchase price. Wording such as ‘all equipment necessary to operate the business is included’ is an uncertain basis for a deal if you later disagree about a particular machine.

The list should include a description, location, serial number where applicable, and the owner identified by the seller. Attach supporting documents for the most important items: purchase invoices, proof of payment and any financing agreements. Compare the list with what you actually see when inspecting the premises.

Ask the seller to distinguish between:

• Equipment owned by the business itself.
• Equipment that is leased or hired.
• Equipment belonging to the franchisor or a supplier.
• Installations belonging to the landlord.
• Personal items that the seller will take away on completion.

An invoice is useful evidence, but on its own it does not prove that the equipment has been paid for or is free of security interests. Nor does a fixed asset register necessarily show what rights third parties have. You should therefore have both ownership and any restrictions on the seller’s right to transfer the equipment investigated.

2. Investigate security interests, leases and retention of title

Equipment may be subject to security interests even if it is on the seller’s premises and used every day. A lender may hold a charge over it, and a supplier may, depending on the circumstances, have a valid retention-of-title clause. With leased equipment, the leasing company typically owns the item.

Ask your lawyer to check relevant entries in Denmark’s Personbogen register, including any floating charge over business assets (virksomhedspant), and compare the findings with the agreements. Depending on the type of equipment, further checks may be necessary. A register search is not sufficient on its own: it does not automatically establish all ownership arrangements, leases or retention-of-title rights.

Where relevant, request:

• Lease agreements showing the remaining term, payments and transfer conditions.
• Details of any debt secured against the equipment.
• Written conditions for a creditor to release the equipment from its security.
• Documentation of any purchase options and their price.

Do not assume that you can take over a lease on the seller’s terms. The lessor or leasing company may need to approve you and may require a fresh credit assessment. Clarify this before counting on the equipment being available from the takeover date.

Also check whether essential accessories and software licences are included. Owning a physical machine does not necessarily give you the right to use the software that makes it work.

3. Understand Danish rules and the importance of the agreement

Denmark has no specific franchise law, no legally required standardised franchise disclosure package and no dedicated registration scheme for franchise agreements. The franchisor’s acceptance of you as a new franchisee is therefore not official confirmation of the seller’s ownership of the equipment.

The Danish Contracts Act and general principles of contract law are central to the agreements you enter into. The Danish Sale of Goods Act may be relevant to purchases of movable property, while the Danish Registration Act governs, among other things, the registration and protection of certain security interests. The specific assessment depends on the right involved, the asset and how the transaction is structured.

If you buy the company, the equipment generally remains with the same legal owner, but the company’s debts and security arrangements do not disappear when ownership of the company changes. If you buy specific assets, you need to establish whether they can be transferred free of third-party rights. Neither situation makes these checks unnecessary.

Depending on the circumstances, general duties of disclosure and good faith may be relevant to the information the seller provides. However, they should not replace a documented investigation before payment.

4. Make release and handover conditions of the purchase

Turn the findings of your investigation into precise terms in the purchase agreement. The equipment list should be attached as a schedule, and the agreement should specify which items will be transferred free of security interests or other third-party rights, and which lease obligations you expressly agree to take on.

If a creditor must be paid to release equipment from its security, your lawyer should arrange payment and release as a coordinated process. A promise from the seller to sort it out afterwards does not offer the same protection as a documented release on completion.

Also agree what happens if a necessary approval is missing: will completion be postponed, must the equipment be replaced, or can the purchase be cancelled? These are points to negotiate, not automatic rights.

At handover, check the list together and record any discrepancies in writing. Practical rule of thumb: Do not pay for ownership until you have evidence of what you are acquiring and how any rights held by others will be dealt with.