Buying a Franchise: What Happens if the Franchisor Changes Hands?

When buying a franchise, you will often assess the people behind the business model. But they may sell the business while your agreement is still in force. Your franchise network could then have new owners with different priorities. Before signing, check whether the agreement protects you if ownership changes or the role of franchisor is transferred to another company.

Distinguish between new owners and a new contracting party

A change of ownership can take several forms, and the distinction matters when assessing the implications.

In a sale of shares in the franchisor company, the company generally remains the same legal entity. Your contracting party will therefore normally remain unchanged, even if the company has new owners, new management or a different strategy. A change of ownership does not, in itself, give you an automatic right to exit the franchise agreement.

A transfer of the franchise business to another company raises a different question: can the franchisor transfer the rights and obligations under the agreement to a new legal entity? This depends on factors including the agreement, the nature of the transfer and general principles of Danish contract and obligations law. Transferring rights and transferring obligations are not necessarily subject to the same conditions.

Ask for separate explanations of these two situations:

• What happens if the owners sell the franchisor company?
• What happens if the company sells the franchise concept and wants another business to become your contracting party?

Look for provisions covering transfers, changes of ownership, intra-group transfers and restructuring. Broad permission to transfer the agreement may carry more weight than wording stating that the relationship is based on personal trust.

Understand the Danish legal framework

Denmark has no specific franchise law. Nor does it have a dedicated public franchise register or a mandatory standardised disclosure document that franchisors must provide before an agreement is signed.

Instead, franchise agreements are governed by the Danish Contracts Act and general principles of contract and obligations law. Depending on the circumstances, other legislation may also apply, including the Danish Competition Act, EU competition rules and the Danish Marketing Practices Act. This means that many of your rights in the event of a change of ownership need to be secured through the specific terms of your agreement.

The absence of specific disclosure rules does not mean that material information can simply be withheld. General principles of good faith and liability during contract negotiations may create a duty to disclose matters of material importance to the other party. Whether specific plans to sell must be disclosed depends on the circumstances, however; you should not assume that you have an unconditional right to information about confidential sale negotiations.

Ask directly whether any current changes to ownership or organisational structure are expected to affect the performance of your agreement. Request a dated response and have an adviser assess any qualifications or caveats.

Check what actually transfers

The key issue is not just who owns the franchisor, but who will be able to provide the agreed services after a transfer.

Before buying, establish which company provides training, operates the ordering system, supplies materials for the franchise concept and organises ongoing support. If several group companies are involved, make sure you understand their roles. A transfer is harder to assess if important functions sit outside the company you contract with directly.

Ask the following questions:

• Must a new franchisor take on all obligations, including support programmes already agreed?
• Who will deal with advance payments and unresolved claims relating to the period before the transfer?
• Can essential systems and rights continue to be used without interruption?
• Who should you contact during the transition if a critical service or supply fails?

A new owner's good reputation is no substitute for a clear allocation of responsibility. If the original franchisor is to be released from its obligations, you should understand exactly when this will happen, on what conditions and with what consequences for existing claims.

Negotiate a workable change-of-ownership clause

A change-of-ownership clause does not have to give you a veto over every sale. Instead, it can set objective requirements for the transition and for the company taking over the obligations.

Consider proposing requirements for written notification, documented assumption of all contractual obligations, and sufficient financial and operational resources on the part of the new contracting party. Also make it clear that a transfer does not, in itself, permit changes to your terms.

If your investment is particularly dependent on specific expertise, you could discuss a transition period during which key functions must be retained. The requirement should focus on services and capacity rather than a promise that particular individuals will never leave the business.

Also agree what happens if the conditions are not met. Should there first be an opportunity to remedy the situation, followed by a specific right for you to terminate? Such rights need to be clearly drafted and legally reviewed; they do not arise automatically simply because you are unhappy with the new owner.

Practical takeaway: Address both changes of ownership and transfers to a new contracting party before signing. The aim is not to prevent the franchise network from evolving, but to ensure that your agreed services and rights remain in place.