Buying an Existing Franchise: Securing the Franchisor’s Approval

Buying a franchised business does not guarantee that you can continue trading under its brand. The seller may be able to sell you the business without being free to transfer the franchise agreement. Joining the network on a sound footing requires coordination between three parties: the seller, the buyer and the franchisor. Here is how to secure their agreement before making a binding commitment.

1. Distinguish the business you are buying from the franchise agreement

Start by clarifying what you are buying: business assets as a going concern (fonds de commerce) or shares in a company. This distinction affects, among other things, how the franchise agreement must be handled.

When buying a fonds de commerce, the franchise agreement does not automatically transfer with the assets sold. Transferring it requires a review of the contractual provisions and applicable law. Article 1216 of the French Civil Code provides that transferring a contract requires the other contracting party’s consent, which may have been given in advance. The transfer must be recorded in writing to be valid.

In a share acquisition, the company operating the business generally remains the same legal entity. This does not mean that the transaction falls outside the franchisor’s control: a change-of-control or change-of-management clause may require its consent or prior notification.

Ask the seller for the signed agreement, its schedules and all amendments. Have your lawyer identify:

• the transactions requiring approval;
• the individuals whose identity is material to the agreement;
• the notification requirements and response deadlines;
• the consequences of completing a transfer without following the procedure.

Never treat the franchisor’s silence as acceptance unless there is a verified contractual or legal basis for doing so.

2. Obtain a written response to your application

Contact the franchisor, in coordination with the seller, before finalising the terms of the sale. The aim is not simply to introduce yourself and your experience: you need to understand the approval process and the terms on which you will be able to operate the business.

Prepare a coherent application covering your experience, operational role, fellow shareholders, acquisition structure and proposed funding. If the future manager is not the main investor, specify who will attend training and who will run the outlet day to day.

Then request a written response that clearly distinguishes between:

• a favourable initial view of your profile;
• approval subject to conditions;
• definitive consent to the transaction as described.

An encouraging email does not necessarily replace the authorisation required by the agreement. The consent must cover the correct buyer, the correct company and the structure actually being used.

Also check whether the franchisor has a right of pre-emption or a preferential right to purchase. Exercising that right could change how the sale proceeds. Notification of the proposed transaction must meet the prescribed requirements for form and content, particularly if the price or sale terms change.

3. Establish which agreement will apply after the acquisition

Two main options may be offered: continuing the existing agreement through a transfer, or signing a new agreement. Their financial implications differ.

With a transfer, check how much of the contractual term remains. An acquisition price based on several years of trading under the brand becomes risky if the agreement is due to expire soon. Do not assume it will be renewed: ask what terms will apply when it expires.

With a new agreement, compare royalties, purchasing obligations, training, refurbishment required to meet brand standards and exit terms. Any initial franchise fee must be expressly clarified: do not assume it is either automatically payable or automatically waived because the business already exists.

In France, the framework introduced by the Doubin Law, codified in Article L. 330-3 of the French Commercial Code, governs pre-contractual disclosure where its conditions are met: a trade name, trade mark or trading brand is made available in return for an exclusive or near-exclusive commitment in carrying on the business. In those circumstances, the pre-contractual disclosure document (document d’information précontractuelle, or DIP), whose contents are specified in Article R. 330-1, and the draft agreement must be provided at least twenty days before signing or, where applicable, before any required advance payment. Build this period into your acquisition timetable, particularly if a new agreement is planned.

4. Make the sale conditional on the necessary approvals

Have the preliminary sale agreement drafted so that you avoid buying a business you cannot operate under the intended brand. Depending on the transaction structure, a condition precedent may require the franchisor’s approval, the transfer of the agreement or the signing of a new agreement on agreed terms.

Specify the deadlines, steps to be taken, evidence required and consequences of a refusal. Coordinate these conditions with the financing arrangements and, where necessary, any formalities relating to the commercial lease.

Before completion, bring together the signed consents, the applicable agreement, the financial terms and the training timetable in a single file. Check that all conditions have actually been satisfied.

Key takeaway: before buying, obtain written answers to three questions: who has been approved, which agreement applies and on what terms? Make your final commitment conditional on legally sound answers.