Buying an Existing Franchise in Hong Kong: Check Brand Approval and Handover Terms Before Signing

Buying an established franchise with an existing customer base may seem easier than starting from scratch. But acquiring its equipment and business does not necessarily give you the right to continue using the brand. Before joining a franchise network, buyers should clarify one central question: will you be able to take over the entire operation lawfully on the completion date? This guide focuses on brand approval and handover arrangements when buying an existing franchise.

1. Establish whether you are buying shares or the business

The asking prices for these two types of transaction may be similar, but their legal consequences differ.

A share purchase means buying the company that owns the franchise outlet. The company remains the same legal entity and generally retains its assets, contracts and existing debts; the buyer takes on the associated economic risks through their shareholding. Do not assume that brand approval is unnecessary simply because the company name stays the same: the franchise agreement may require prior consent for a change of control.

A business or asset purchase involves acquiring specified items, such as equipment, stock and goodwill. You must check individually whether the franchise agreement, lease, supply arrangements and licences can be transferred. An agreement between buyer and seller that “everything will stay the same” does not bind the franchisor, landlord or licensing authorities.

Before signing a letter of intent, ask the seller for the franchise agreement and all supplementary documents, and identify the contracting party to each agreement. The trading name, company receiving payments, tenant and authorised franchisee may not be the same. Investigate any discrepancies first.

2. Obtain clear written confirmation from the franchisor

Do not rely solely on the seller’s claim that “head office always approves transfers”. With the seller’s authorisation, verify the following directly with the franchisor:

• Who and what the approval covers: Does it apply to you personally, your company or a particular change in shareholding? Is it limited to the current premises?
• How you will take over: Will you take over the existing agreement, enter into a novation agreement or sign a new franchise agreement? Will the remaining term and renewal arrangements be preserved?
• Outstanding obligations: Are there unpaid royalties, notices requiring remedial action or disputes over breaches? Does the franchisor require these to be resolved first?
• New requirements: Will you need to undergo further training, replace equipment, refurbish the premises or pay transfer and approval fees?

Pay particular attention to differences between the old and new agreements. The seller’s territorial arrangements, preferential fees or allocation of online orders may not carry over to you. If the franchisor will only offer a new agreement, reassess the business’s value under those terms rather than relying on the seller’s profit forecasts.

Written approval should also clearly state its validity period and any conditions still to be met. A statement that there is “no objection in principle” is not enough to establish that you can use the brand after completion.

3. Hong Kong has no dedicated franchise disclosure regime: build due diligence into the transaction

Hong Kong currently has no legislation specifically regulating franchising, nor any generally applicable mandatory franchise disclosure document, franchise registration scheme or statutory franchising code. Business registration does not amount to government approval of a franchise opportunity. Buyers should not assume that they have a statutory franchise cooling-off period either.

Franchise relationships are governed primarily by common law contract principles and applicable legislation, including the Misrepresentation Ordinance (Cap. 284). Brand use is subject to intellectual property legislation such as the Trade Marks Ordinance (Cap. 559), while employing staff involves requirements under the Employment Ordinance (Cap. 57) and other relevant laws. A franchise is a business investment: do not assume that consumer protection provisions will provide a remedy for investment losses.

For a business transfer, ask a lawyer to assess the application of, and procedures under, the Transfer of Businesses (Protection of Creditors) Ordinance (Cap. 49). Do not assume that stating “no existing debts will be assumed” in the sale and purchase agreement is enough to exclude creditors’ statutory rights. Confirm the requirements for publishing notices, the relevant time limits and their legal effects before setting the completion date.

Practical due diligence should cover rent and supplier arrears, staff wage and holiday records, customer advance payments, gift vouchers and unfulfilled orders. Require the seller to support their statements with documents, and include key warranties, remedies for breach and appropriate indemnities in the agreement. These provisions help allocate risk, but they neither replace due diligence nor remove the risk that the seller may be unable to pay compensation.

4. Link brand approval, the lease and funding through completion conditions

Treating brand approval separately from completion and payment is a common source of risk. A safer approach is to have a lawyer make the necessary approvals and handover documents conditions precedent to completion, with a clear deadline, arrangements for withdrawing if the conditions are not met, and provisions governing the deposit.

The conditions should usually cover written franchisor consent, the franchise documents taking effect, landlord consent or the signing of a new lease, and the necessary licence or permit arrangements being in place. If you need a loan, negotiate a financing condition too. A loan application still being assessed does not, by itself, entitle you to cancel the purchase without liability.

Do not budget solely for the purchase price. Allow separately for franchisor approval fees, legal and accounting fees, lease deposits, stock adjustments, refurbishment and equipment costs, and working capital during the handover. In particular, check whether the franchise term aligns with the lease term. An imminent lease renewal or required refurbishment could substantially alter your assumptions about how long it will take to recover your investment.

At completion, use a checklist to hand over keys, equipment, stock, operating records and any system access that may lawfully be transferred. The transfer of customer data requires a separate assessment under the Personal Data (Privacy) Ordinance (Cap. 486). A database cannot simply be handed over like ordinary goods.

Practical takeaway: Before paying, verify four things: what you are buying, whose approval is needed, what obligations remain outstanding and when you can begin operating. Write these into completion conditions with clear consequences if they are not met. Until brand authorisation is secured, the fact that an outlet is currently trading does not mean you will be able to carry on as usual after taking over.