Franchising in Denmark: Agree the Rules for Changes of Ownership

When you turn your existing business into a franchise network, the first openings naturally take centre stage. But your very first franchise agreement should address what happens when a franchisee wants to sell. Clear rules on changes of ownership protect the concept and help franchisees plan their future, without promising an unconditional right to transfer the franchise relationship.

Distinguish between selling the business and transferring the agreement

A franchise business can be sold in several ways. The buyer might acquire equipment, stock and other assets, or buy the shares in the company operating the outlet. This distinction matters for the franchise agreement.

In an asset sale, the buyer will generally be a different contracting party. Buying the fixtures, fittings and customer-facing operations does not, in itself, confer the right to use your trade mark and business concept. That right must be secured through an approved transfer or a new franchise agreement.

In a sale of the company's shares, by contrast, the same legal entity normally remains party to the agreement. If you want the right to approve a new controlling owner, the agreement should therefore expressly cover changes of control. A clause dealing with the transfer of the agreement itself will not necessarily cover this.

Ask your adviser to specify which events require approval:

• Transfer of the franchise agreement to another business.
• Sale of a controlling stake in the operating company.
• An indirect change of ownership through a holding company.
• Internal restructurings, which may qualify for a simpler procedure.

Avoid wording so broad that every minor ownership change requires the same extensive review as a full sale.

Exercise contractual freedom within clear limits

Denmark has no dedicated franchise legislation and no specific registration scheme for franchise agreements. Nor is there a statutory franchise disclosure package that must be provided before signing. However, ordinary business registration requirements and any activity-specific licensing requirements still apply.

Franchise agreements are governed primarily by the Danish Contracts Act and general principles of contract law. Depending on the circumstances, other legislation may also apply, including the Danish Competition Act, Marketing Practices Act and Business Lease Act. There is therefore no specific Danish franchise rule providing a ready-made procedure for changes of ownership.

Freedom of contract allows you to set consent requirements, buyer qualifications and the process leading up to completion. That freedom is not unlimited: under section 36 of the Danish Contracts Act, unreasonable agreements or terms may be amended or set aside. The provision is applied sparingly in commercial relationships, but should still form part of the legal assessment.

The general duty to disclose information in good faith also matters. When discussing a change of ownership with a prospective franchisee, you should not withhold known facts that are material to their decision. A sale process does not make misleading information about the concept any less problematic.

Make the approval process predictable

A clause stating that the franchisor may freely reject any buyer offers little practical guidance. Instead, describe the objective factors you will assess. These might include the buyer's funding, relevant experience, ability to take an active role in the business and willingness to meet the concept's requirements.

Distinguish between essential requirements and preferences. If daily presence is crucial to the concept, make that clear. If training and a suitably qualified day-to-day manager can compensate for a lack of experience, the process should reflect that too.

Then agree a clear sequence of steps:

1. The seller gives notice of their intention to sell and provides information about the buyer.
2. The franchisor identifies any further information needed to assess the application.
3. The buyer is assessed against the agreed criteria.
4. Approval or refusal is given in writing, preferably with reasons.
5. The parties document the conditions for completion.

Set realistic response deadlines and specify when the clock starts. Also explain what happens if no response is given; do not leave the parties guessing whether silence amounts to consent.

If the seller must pay for your handling of the ownership change, the agreement should state how the fee is calculated and which services it covers. Avoid unexpected costs late in the sale process.

Set out the conditions before completion

An approved buyer is not the same as a completed transfer. Clarify whether the buyer will take over the existing agreement or sign a new one. This affects matters such as the remaining term, payments and any requirements to upgrade premises or equipment.

Draw up a shared checklist of the conditions for completion. These may include signed agreements, required training, access to systems and the landlord's consent where needed. Have the relevant advisers clarify employment matters and other obligations arising from the business transfer.

Specify separately who is liable for outstanding amounts and other obligations relating to the period before completion. The seller should not assume they have been released from liability simply because the buyer has been approved. Any guarantees must also be addressed expressly.

Practical takeaway: Include a change-of-ownership procedure in your first franchise agreement. Define what requires consent, how the buyer will be assessed and which conditions must be met before the outlet changes hands.