Buying a franchise: clarify the terms for selling on

Buying a franchise means joining a community of entrepreneurs, but it also means investing in a business you may eventually wish to sell or pass on. Before committing, check the conditions under which a buyer can continue trading under the brand. A poorly defined approval clause can complicate a sale, cause delays or narrow the pool of potential buyers. Here is how to assess this mechanism without confusing the sale of the business with the transfer of the franchise agreement.

1. Identify which transactions require the franchisor’s approval

An approval clause gives the franchisor a say in accepting a prospective buyer. One reason for this is the personal nature of the agreement, often referred to as intuitu personae: the network has chosen an entrepreneur for their skills, commitment and ability to implement its business concept.

Start by identifying the events covered by the draft agreement. Does the clause apply only to the sale of the business as a going concern — known in France as the fonds de commerce? Does it also cover share transfers, a change of control or even the replacement of the person running the company?

Selling a business’s assets and goodwill and selling shares in the company do not have the same effects. In the first case, the buyer is a different legal person. In the second, the company that signed the agreement remains the same, but a clause may still require prior approval because its shareholders are changing.

Test the wording against three practical scenarios: selling the whole business, bringing in a minority investor and passing the business on to a family member. For each, ask whether notification is enough or whether approval is required. Avoid wording so broad that it creates uncertainty around any change in share ownership.

2. Understand the French legal framework

France has no single statutory regime governing franchise agreements in their entirety. General contract law applies, including the duty of good faith under Article 1104 of the French Civil Code. Approval arrangements therefore depend largely on the agreement, subject to applicable legal rules.

The rules introduced by the Doubin Law of 31 December 1989, now codified notably in Articles L.330-3 and R.330-1 of the French Commercial Code, govern pre-contractual disclosure. They apply where a party makes a trade name, trade mark or trading identity available while requiring an exclusive or near-exclusive commitment for the activity concerned.

Under these rules, the pre-contractual disclosure document and draft agreement must be provided at least twenty days before the agreement is signed or any advance payment is made. The required information includes the conditions for transferring the agreement. This period is a statutory minimum, not confirmation that the clause is fair and balanced.

Article 1216 of the French Civil Code also provides that transferring a party’s position under a contract requires the other contracting party’s consent, which may be given in advance. The transfer must be recorded in writing to be valid. Never assume, therefore, that the franchise agreement will automatically transfer with the sale of the business.

3. Ask for a workable approval procedure

A useful clause should help you prepare for a sale, rather than merely establish a power to accept or reject a buyer. Before signing, seek written answers to the following questions:

• What criteria must a prospective buyer meet: experience, personal capital contribution, availability or training?
• Which documents are needed for a complete application?
• Who should receive the request, and how can receipt be proved?
• What is the deadline for a response, and what triggers the start of that period?
• Must reasons be given for a refusal?
• What does the agreement expressly provide if no response is received?

Do not assume that silence automatically means approval. Ask your legal adviser to check the precise effect of the wording.

Also distinguish between the stated criteria and matters left to the franchisor’s judgement. A transparent procedure makes it easier to shortlist buyers and avoids spending months negotiating with someone who clearly does not meet the network’s requirements.

Finally, ask whether the buyer will take over the existing agreement or have to sign a new one. This can change the remaining term, the financial obligations and, indirectly, the commercial appeal of your business to the buyer.

4. Plan for costs and your release from obligations after the sale

List any costs that may be associated with the transfer: application assessment fees, training for the buyer, a new initial franchise fee or alterations to the premises. These costs are not automatically payable: identify their contractual basis, their amount or how they are calculated, and who must pay them.

When selling, ensure that the sale agreement and the franchisor’s approval are coordinated. Your legal adviser can include an appropriate condition precedent so that the purchase does not become final without the buyer being able to trade under the brand.

Check your own exit position too. Consent to the transfer does not necessarily release you from all future obligations. Make sure that this release is expressly addressed, and deal separately with any personal guarantees, which may require the consent of those who benefit from them.

Key takeaway: before buying, insist on a clear transfer procedure covering the transactions concerned, approval criteria, deadlines, costs and the conditions for releasing you from your obligations. This will help you prepare for an eventual sale or handover from the moment you join the franchise network.