Franchising: setting clear rules for approving a buyer

Turning your business into a franchise also means planning for the eventual resale of franchised outlets. Within this network of independent business owners, a buyer approval clause allows you to assess a prospective buyer without making a transfer impractical. Here is how to build this mechanism into your very first agreement, with a clear procedure for the seller, the buyer and your team.

1. Define precisely what requires your consent

A franchisor does not automatically have a general right to veto every sale. Its role depends, in particular, on the contractual provisions and the proposed transaction. The clause should therefore specify which events require approval, rather than indiscriminately covering every change within the franchised business.

Distinguish in particular between:

• the sale of the business as a going concern (the French fonds de commerce), which does not, in itself, transfer the franchise agreement;
• the transfer of the franchise agreement, which is subject to the general rules of French law governing the transfer of contracts;
• the sale of shares in the franchisee company, which retains its legal identity;
• a change of control or the replacement of a manager whose expertise was a deciding factor in your agreement to enter into the franchise relationship.

A minority shareholding with no impact on management does not raise the same issues as a full takeover. Work with your legal adviser to define the relevant thresholds and circumstances in a way that is consistent with your franchise concept.

Also specify the intended outcome: continuation of the existing agreement following approval, execution of a transfer agreement or entry into a new franchise agreement. These options are not interchangeable, particularly in terms of the remaining contract term and financial obligations.

2. Establish defensible approval criteria

Approval should support the continuity of the concept and the quality of the network, rather than allow arbitrary decisions. In France, franchise agreements are governed primarily by general contract law and commercial law, as well as competition law. Article 1104 of the French Civil Code requires good faith in the negotiation, formation and performance of contracts.

Translate your expectations into measurable criteria: financial resources appropriate to the proposed acquisition, relevant experience, availability, qualifications required for the activity and the ability to complete the planned training. Avoid vague wording such as “a suitable profile” without further explanation.

Prepare a standard assessment framework for all applications. For each criterion, specify the supporting evidence required and the person responsible for assessing it. Do not request more information than necessary: an acquisition application contains personal data and confidential financial information.

If you refuse approval, keeping a record of factual, consistent reasons is a useful precaution. Even where a clause grants considerable discretion, it does not remove the obligation to perform the agreement in good faith. Have any sensitive decision reviewed before communicating it.

3. Set up a procedure that does not hold up the sale

A buyer and their lender need clarity. Set out the application process: who should receive it, how it should be submitted, the documents required, acknowledgement of receipt and the response deadline. Clearly define when the response period begins, for example on receipt of a complete application.

To prevent an application from remaining incomplete indefinitely, also set a deadline for notifying the applicant of missing documents. The agreement must specify the consequences of silence: do not suggest that a failure to respond amounts to automatic acceptance under the law.

Separate three stages: assessment of the candidate, any approval subject to clearly defined conditions, and completion of the transfer. Requirements such as completing training or securing finance should be identified early enough for the parties to plan their timetable.

Finally, do not confuse buyer approval with a preferential purchase agreement (pacte de préférence). The former concerns acceptance of the buyer; the latter may give its beneficiary priority to purchase, depending on its terms. If both mechanisms apply, their interaction must be made explicit.

4. Prepare disclosure and onboarding for the incoming franchisee

Approval does not replace pre-contractual disclosure. Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law of 31 December 1989, applies where a business makes a trade name, trade mark or trading sign available while requiring exclusivity or near-exclusivity for the activity.

Where these conditions are met, particularly when entering into a new agreement with the buyer, the pre-contractual disclosure document and draft agreement must be provided at least twenty days before signing or any advance payment. Article R. 330-1 specifies the document’s contents. For a straightforward transfer of the existing agreement, ask your legal adviser to determine the legal nature of the transaction and the applicable obligations.

Finally, plan ahead for training, access to tools and the handover of operating instructions. Legal approval alone does not make the incoming franchisee ready to operate.

Key takeaway: prepare a precise clause, a document checklist and a standard timetable now. A well-organised transfer protects the concept while respecting the franchisee’s plans for realising the value of their business.