Buying a franchise: reviewing the right of first refusal

Buying a franchise means joining a community of entrepreneurs, but also building a business asset that you may eventually wish to sell. Among the clauses to review before buying, the right of first refusal — known in France as a pacte de préférence — deserves particular attention: it may require you to offer the franchisor the first opportunity to enter into a proposed transaction. Understanding how it works helps you preserve your ability to sell, rather than discovering a restrictive procedure when it is too late.

1. Distinguish the right of first refusal from buyer approval

The pacte de préférence is defined in Article 1123 of the French Civil Code. One party undertakes to give the beneficiary the first opportunity to contract with them if they decide to enter into a transaction. In a franchise agreement, it may therefore give the franchisor priority when the business assets and goodwill — the French fonds de commerce — are sold.

A right of first refusal is not the same as buyer approval. Buyer approval, or agrément, allows the franchisor to approve a prospective buyer under the terms of the agreement. A right of first refusal allows the franchisor to pursue the proposed transaction itself. Both mechanisms may apply, with separate procedures and deadlines.

Do not rely solely on the clause’s heading. Terms such as ‘priority’, ‘preference’ or ‘pre-emption’ may describe differently worded provisions. Ask for clarification on what triggers the mechanism, what its beneficiary can request and when restrictions on your freedom to negotiate take effect.

A right of first refusal does not, in itself, amount to a promise by the franchisor to buy your business. Do not therefore treat it as a guaranteed route to a sale in your exit plan.

2. Establish which transactions and parties are covered

Ask your adviser to review the agreement, its appendices and the pre-contractual disclosure document, known as the DIP, together. In France, the framework introduced by the Doubin Law is set out notably in Articles L. 330-3 and R. 330-1 of the French Commercial Code. Where the rules apply, the DIP and draft agreement must be provided at least twenty days before signing or, where applicable, before any required advance payment. Among other things, the DIP must specify the conditions for transferring the agreement.

This advance disclosure does not remove the need to examine the right of first refusal itself. List the transactions it covers:

• sale of the business assets and goodwill (fonds de commerce);
• transfer of shares in the franchisee company;
• direct or indirect change of control;
• transfer of leasehold rights;
• contribution of assets or restructuring of asset ownership, if included in the wording.

Do not assume that a clause limited to business assets also covers shares, or vice versa. Identify the beneficiary too: is it the franchisor alone, a named company or another party that may take its place under the agreement?

Finally, check how long the right lasts and whether it survives the end of the agreement. Any obligation that continues after you leave the network should be identified before you buy, then assessed legally in light of its wording and context.

3. Negotiate a workable procedure

An unclear procedure can delay a sale and discourage a buyer. The aim is not necessarily to remove the right of first refusal, but to make its exercise predictable.

Start with the information that must be notified: the price, payment terms, conditions precedent, guarantees required and proposed timetable. An offer involving immediate payment is not financially equivalent to one involving seller financing. The comparison should therefore go beyond the headline price.

Then ask for clarity on:

• who must receive the notice and how it must be delivered;
• the documents needed for a complete submission;
• when the response period starts and how long it lasts;
• what happens if no response is received;
• the deadline for completing the sale once the right has been exercised;
• which changes require a fresh notification.

There is no single statutory response period applicable to every right of first refusal in a French franchise agreement. Avoid building your timetable around a period presented as universal.

Also ask how the right of first refusal and buyer approval interact: do their respective time limits run concurrently or consecutively? Have any agreed changes recorded in the contractual documents rather than relying on verbal assurances.

4. Understand the consequences of non-compliance

Do not try to bypass the right by rushing to sign with a third party. Under Article 1123 of the French Civil Code, a breach may entitle the beneficiary to compensation for the loss suffered. If the third party knew both that the right existed and that the beneficiary intended to exercise it, the beneficiary may also seek to have the contract set aside or to take the third party’s place in it.

The same article provides for a formal enquiry procedure, known as an action interrogatoire: a third party may ask the beneficiary in writing to confirm whether the right exists and whether they intend to invoke it. This procedure is subject to specific requirements and warrants a lawyer’s involvement.

Before buying, work through a hypothetical future sale with your adviser: receipt of an offer, notification, response and then completion. This exercise can reveal obstacles that a simple reading may miss.

Key takeaway: before signing, secure a clearly defined scope, a workable timetable and written provisions explaining how the right interacts with buyer approval. Planning for your eventual sale starts as soon as you join the franchise network.