Buying a Franchise: Securing Sale and Succession Arrangements in the Contract

When joining a franchise network, your first thoughts are usually about setting up and running the business. But its eventual sale deserves attention before you sign: a commercially successful outlet is not automatically transferable. What matters is whether a successor can take over the business together with its place in the network, and what conditions the franchisor imposes. Checking this protects your flexibility as a business owner and the value of your business.

1. Distinguish ownership of the business from the franchise agreement

There are several separate elements to consider when selling a franchise business. Fixtures and fittings, stock and other business assets can be covered by a sale agreement. This does not, however, mean that the buyer also acquires the right to use the brand and continue operating as part of the franchise network.

Transferring the entire franchise agreement generally requires the consent of all parties involved. The original agreement may already provide for advance consent subject to certain conditions. Simply assigning individual claims does not amount to transferring the agreement. Alternatively, the existing agreement can be terminated and the successor can enter into a new one. These models have different commercial implications.

If, instead, shares are sold in a company that is itself the franchisee, that company generally remains the contracting party. Even so, the franchise agreement may require consent to a change in shareholders or provide for other consequences. You should therefore check change-of-control clauses, not just sections headed “Transfer”.

Germany has no dedicated franchise legislation and no franchise-specific government licensing system or register of agreements. The main applicable rules are those of the German Civil Code (BGB), where relevant the German Commercial Code (HGB), and other general legislation depending on the structure of the arrangement. Standard-form transfer clauses are subject in particular to scrutiny under sections 305–310 BGB. This does not, however, give you an unrestricted right to insist on any successor you choose.

2. Check that consent is based on clear criteria

A franchisor has a legitimate interest in ensuring that a successor has the professional skills and financial resources required by the concept. For you, however, succession becomes difficult to plan if the agreement merely requires consent without explaining the procedure.

Before joining the network, ask what requirements a buyer must meet. Useful points to check include:

• Qualifications: What professional experience, qualifications and training are required?
• Financial standing: What evidence must be supplied, and what requirements apply?
• Personal suitability: Who assesses this, and against which criteria?
• Decision-making process: Which documents are needed for a complete application, and when will a decision be made?
• Refusal: Must the franchisor explain its reasons in writing?

Try to negotiate objective requirements and a reasonable deadline for a decision once all required documents have been received. Silence does not automatically mean consent; any provision to that effect would need to be legally valid.

Also ask for an anonymised account of the usual handover process. This will help you establish whether a procedure is already in place or would have to be developed when you come to sell. A non-binding assurance such as “We always find a solution” is no substitute for a robust contractual provision.

3. Protect your sale proceeds from additional conditions

A prospective buyer assesses more than the existing business. They also consider the terms on which they will be allowed to operate it. If they must sign a new franchise agreement with different fees, additional investment requirements or only a short guaranteed period of operation, this may reduce what they are willing to pay.

Clarify explicitly whether the existing agreement can be transferred on its current terms or whether a new agreement is the only option. Also request a complete breakdown of the fees associated with the handover, such as administration fees, training fees or a further initial franchise fee. Responsibility for paying these should be clearly allocated. Whether a particular fee clause is legally valid requires a separate assessment.

The franchisor’s pre-emption rights and purchase options deserve particular attention. They are not the same: a pre-emption right is generally triggered by a sale agreement with a third party, whereas a purchase option may allow the franchisor to acquire the business independently under the agreed conditions. For each, have the triggers, deadlines, pricing mechanism and relationship with third-party offers reviewed.

Then work through an illustrative sale calculation. Deduct outstanding finance, handover costs and contractual payments from the expected sale price. Do not assume that you will automatically receive compensation for the business value you have built up.

4. Put binding handover and personal succession arrangements in place

A franchise agreement alone does not transfer the lease or all financing, supply and other business contracts. Draw up a list of the further consents needed to ensure the business can actually continue operating. The employment law implications of a business transfer, particularly under section 613a BGB, should also be reviewed by a qualified adviser.

Coordinate the timing of the agreements: you should not be unconditionally obliged to complete the business purchase while the franchisor’s required consent is still outstanding. Appropriately drafted conditions precedent can address this.

Also plan for death or permanent incapacity. Inheriting a business does not guarantee that family members can continue running it within the franchise network on unchanged terms. Clarify arrangements for interim management, qualification requirements and deadlines for nominating a suitable successor. Have your franchise agreement and personal succession plan aligned.

Practical takeaway: Only sign once the transfer route, consent criteria, costs and handover process are clearly set out. Planning succession early does not guarantee a future sale, but it makes it considerably easier to plan.