Buying an Existing Franchise in Hong Kong: Check Brand Approval, the Remaining Term and Liabilities Before Paying

Buying an established franchise outlet may seem like a way to save time on setting up, but acquiring its fit-out, equipment and stock does not necessarily give you the franchise rights. Prospective buyers in Hong Kong should verify the business purchase and the brand authorisation separately, then link the conditions under which each takes effect. Otherwise, you could pay for the business only to find that you cannot continue trading under the existing brand.

1. First, establish exactly what you are buying

What a seller describes as a ‘transfer of the whole business’ may be a sale of the outlet’s assets, or a sale of shares in the company that owns it. These structures carry different liabilities, which cannot be assessed from a list of items included in the sale alone.

An asset sale should itemise the equipment, stock, fit-out and any other transferable rights, with checks to confirm that the seller is entitled to sell them. The franchise agreement, premises lease and supply arrangements will not necessarily transfer automatically with the assets. Some may require separate consent or new agreements.

A share sale usually leaves the existing company holding its assets and bearing its debts. Once the buyer takes control, they must also deal with the company’s outstanding debts, claims and other historical issues. Even if the contracting company remains unchanged, the franchise agreement may still require brand approval for a change of control.

Ask the seller for the complete franchise agreement, including schedules, amendments and relevant notices. Check that the named contracting party matches the company actually operating the business. Do not accept ‘this is how everyone has always done it’ as evidence of legal rights.

2. Confirm brand approval and the remaining term together

Verify the transaction directly with the brand representative authorised to approve it, rather than relying solely on what the seller or broker tells you. The key question is not whether the brand welcomes you in principle, but which arrangement it is approving: taking over the existing agreement, signing a three-party agreement to document the transfer, or terminating the old agreement and signing a new one with you.

Before signing, obtain written answers on:

• Term: Will the original expiry date remain, or will you receive a new operating term?
• Conditions: Must you pass an interview, complete training, undergo financial checks or carry out remedial work at the outlet?
• Fees: Are there transfer fees, new franchise fees, training fees or required refurbishment costs? Who will pay them?
• Existing issues: Are there outstanding remedial requirements, unpaid fees or breach notices relating to the outlet?

For example, if the purchase price includes what the seller calls ‘brand value’, but the actual authorisation has only a short time left to run, the buyer should not value it as though it provides years of trading rights. A renewal option is not the same as an unconditional right to renew: assess it against the actual terms.

Add together the purchase price, brand fees, necessary remedial work and reopening costs. Then assess whether the acquisition makes financial sense over the confirmed operating term, rather than assuming that the brand will extend the agreement.

3. List existing liabilities rather than relying on ‘everything has been settled’

An existing outlet may have unfulfilled orders, customer advance payments, prepaid packages, refund requests and unpaid supplier invoices. These affect both the completion price and the cash you will need after taking over, as well as customer relationships.

Ask the seller for an itemised breakdown and reconciliation records as at an agreed date. For each liability, record the amount, the deadline for fulfilling the obligation, the relevant contract and who is expected to deal with it. For prepaid services in particular, establish who received the money, who will provide the services after the takeover, whether the brand’s system will continue to accept redemptions, and whether the buyer will receive the corresponding funds or a price adjustment.

A clause stating that ‘the seller remains responsible for all existing debts’ will not necessarily exclude the statutory rights of customers, employees or creditors. Where a business is being transferred, ask a solicitor to assess whether the Transfer of Businesses (Protection of Creditors) Ordinance (Cap. 49) applies, along with the relevant notice requirements and liability arrangements. Do not assume that buying only the assets necessarily removes the risk of existing debts.

For items that cannot be verified immediately, consider negotiating retention of part of the purchase price, post-completion reconciliations and a claims procedure. The conditions and deadlines for releasing retained funds must be clearly documented. These arrangements are no substitute for checking the underlying records.

4. Align payment conditions with the start of your authorisation

Hong Kong has no franchise-specific legislation, nor a generally applicable statutory franchise disclosure document regime, franchise registration system or mandatory franchise code of conduct. Buyers should not assume that the brand or seller must provide a complete transfer information pack in a prescribed format.

Transactions remain subject to common-law contractual principles and other applicable rules. Pre-contractual misrepresentations may fall within the Misrepresentation Ordinance (Cap. 284), while share transactions and corporate arrangements may also involve the Companies Ordinance. Specific liabilities depend on the transaction structure, documents and facts.

A safer approach is to set out conditions precedent to completion in the sale documents. These might include obtaining written brand approval, signing the franchise documents and securing the necessary arrangements for use of the premises. Also specify a final deadline for completion, refund arrangements if the conditions are not met, and who is responsible for maintaining normal operations before completion.

On completion day, coordinate confirmation that the brand authorisation has taken effect with asset checks, payment and verification of the liability schedule. This helps avoid completing the purchase while brand approval is still outstanding. A solicitor should review the sale and franchise documents together, rather than treating them as separate matters.

Practical takeaway: First establish what you are buying, then confirm how long the brand will allow you to operate, and only then decide how much to pay. Until you have written approval and a clear understanding of the outlet’s existing liabilities, do not treat a payment for the business as securing the full package of franchise rights.