Transferring a franchise agreement: prepare for a change of franchisee

When you turn your existing business into a franchise network, getting your first franchisee started often feels more important than planning for their possible departure. Yet a franchisee may later wish to sell their business or company. That is why you should establish the rules for transferring an agreement before signing your first franchise agreement. A sound process gives franchisees a predictable route to exit and the network a way to safeguard business continuity.

1. Distinguish between a business sale, a share sale and an agreement transfer

A change of franchisee is not a single legal event. In a business sale, the buyer acquires the agreed business assets, such as equipment and stock. However, the rights and obligations under the franchise agreement do not pass to the new company simply through a sale agreement between seller and buyer. The franchisor’s consent and the arrangements for the transfer must be dealt with separately.

In a share sale, the franchisee company remains the same contracting party even though its ownership changes. A clause simply prohibiting the transfer of the agreement may therefore not cover a change of ownership. If the franchisor wishes to approve whoever acquires control of the company, the agreement needs a clear clause to that effect.

Define, at a minimum, what is meant by:

• transferring the agreement to another company
• a change of control of the company
• a change in the individually approved person responsible for operating the franchise
• a corporate restructuring that changes the contracting party or its ownership.

Decide at the same time whether the buyer will continue under the existing agreement or enter into a new one. The distinction affects the remaining agreement term, fees and investment planning. These matters should not be left unresolved until the seller has already agreed a purchase price.

Also specify when an initial intention to sell must be notified. Early discussions help with planning, but notification does not in itself constitute approval of the buyer or permission to transfer the agreement.

2. Base your approval process on Finnish rules

Finland has no franchise-specific legislation or official registration system for franchise agreements. The contractual relationship is governed by legislation including the Contracts Act, the Unfair Business Practices Act, the Competition Act and the Trademarks Act, as well as applicable EU competition law. Finland also has no statutory franchise disclosure document in a prescribed format.

Freedom of contract provides scope to design transfer terms, but it does not permit unreasonable arrangements. Section 36 of the Finnish Contracts Act allows an unreasonable contract term to be adjusted or set aside. Transfer terms should therefore be assessed both against the network’s need for protection and from the outgoing franchisee’s perspective.

In its Pronuptia judgment, the Court of Justice of the European Union recognised a franchisor’s interest in selecting its franchisees: making an agreement transfer subject to consent can help protect the network’s reputation and maintain franchisees’ professional competence. However, the judgment does not provide blanket approval for all transfer restrictions. The substance of the terms and the applicable competition law must be assessed separately.

The Finnish Franchising Association’s Code of Ethics, meanwhile, is a form of self-regulation, not legislation. It is binding on the association’s members and should not be confused with approval granted by a public authority.

Put the practical approval process in writing. Specify what the application must contain, who is responsible for handling it and the target timescale. Also explain the grounds on which a buyer may be approved or rejected. Relevant criteria may include adequate funding, the ability to manage the outlet and willingness to complete the network’s required training. Do not leave the decision to an undefined notion of ‘suitability’ alone.

3. Make costs and responsibilities clear before a sale

Franchisees should be able to assess the financial implications of leaving before they start looking for a buyer. Itemise any transfer fee, the cost of training the buyer and other charges associated with the changeover. State who pays and when the obligation to pay arises.

If you charge a transfer fee, define its basis and what it covers. A vague right to charge all costs incurred by the network makes transaction costs difficult to predict. Avoid overlapping charges where it is unclear what is being provided in return. The reasonableness of a fee must be considered as part of the overall contractual arrangement.

Draw up a table allocating responsibilities for matters such as:

• franchise fees and other amounts owed before the changeover
• customer advance payments, gift cards and outstanding orders
• the treatment of stock, equipment and local contracts
• security and guarantees provided by the outgoing franchisee, and any release from them
• any remedial work needed to restore compliance with the franchise concept.

An agreement between the franchisor, seller and buyer does not, on its own, alter the rights of customers or other third parties. Any consents required from landlords and lenders, for example, must be checked separately. Likewise, the implications for staff must be assessed under employment law if the transaction may constitute a transfer of an undertaking.

Keep the business purchase price separate from the franchisor’s approval decision. Approving a buyer to join the franchise network does not mean that the franchisor guarantees that the price is appropriate or that the buyer will be profitable.

4. Manage the changeover through a structured handover

Plan the sequence in advance: first gather the necessary information, then assess the buyer, arrange the contracts and training, and finally hand over operations. The seller and buyer should consider making the sale conditional on obtaining the necessary consents. The franchisor’s own approval must be documented before the new franchisee starts using the concept.

Prepare a checklist for handover day. It should cover continuity of the right to use the trade mark, system login details, billing information, key contacts, and communications with customers and staff. Check separately the lawful basis for processing and, where relevant, transferring customer data; a change of franchisee does not in itself give unrestricted permission to transfer all data.

Confirm in writing when the new franchisee’s obligations begin and the extent to which the outgoing franchisee is released from liabilities. Simply handing over the keys does not end contractual obligations or guarantees. Also agree how you will stay in contact during the initial period, so that interruptions to customer service and outstanding matters are identified promptly.

Practical checklist: before signing your first franchise agreement, prepare a transfer clause, an approval process, a breakdown of costs and a handover-day checklist. Have the full package reviewed by a lawyer familiar with Finnish contract and competition law. This makes a change of franchisee a planned part of the franchise network’s lifecycle, rather than an exceptional event to be dealt with in a hurry.