Buying an Existing Franchise Business: What Are You Taking On?

When you buy an existing franchise business, you are not starting with empty premises: there may already be an established customer base, an experienced team and verifiable turnover. However, you may also encounter existing liabilities and contracts that cannot automatically continue. Joining the franchise network therefore needs to be treated separately from buying the business. The key question is: exactly what are you taking over, on what terms, and who is responsible for the consequences of past operations?

1. Are you buying shares in the company or the business assets?

The phrase “franchise business for sale” can describe two fundamentally different transactions. In a share purchase, you acquire ownership of the company operating the business. The company remains the same legal entity, so its contracts, receivables and debts generally remain in place. Tax risks or supplier disputes arising from earlier periods do not disappear simply because ownership changes.

In an asset purchase, by contrast, you acquire specified equipment, stock and other assets. This does not automatically give you rights under the franchise agreement or the lease. Continuing these arrangements may require a separate agreement, consent or a new contract. Nor does an asset purchase mean starting free of all obligations: the position of employees, for example, needs to be examined separately.

Before making an offer, draw up an itemised list covering:

• which assets and stock are included in the purchase price;
• which contracts you intend to continue;
• who is entitled to collect outstanding receivables;
• who will deliver services that have already been paid for but not yet provided;
• which licences, permits or notifications the new operator will need.

Choose the transaction structure with advice from a lawyer and an accountant. Do not decide solely on the immediate tax cost: inherited risks and continuity of operations are equally important.

2. Obtain separate approval from the franchisor

The seller may not be free to transfer the franchise rights. The agreement may require prior consent to a transfer and may also impose specific conditions on a change in ownership of the operating company. Even in a share purchase, you should not simply rely on the fact that the contracting company remains unchanged.

Ask for written confirmation that the franchisor accepts you as the new owner or operator. Clarify whether the existing agreement will continue, be transferred to you, or need to be replaced by an entirely new agreement. Ask specifically about any transfer fee, personal eligibility requirements and any unresolved breaches of contract by the seller.

Hungary has no standalone, comprehensive franchise act, but the relationship is not unregulated: Act V of 2013, the Hungarian Civil Code, includes provisions governing franchise agreements. General contract law also matters, as do company law provisions where you are buying shares.

Hungary does not have a general disclosure regime based on a mandatory US-style Franchise Disclosure Document (FDD). However, pre-contractual duties to co-operate and provide information do apply. The Hungarian Franchise Association’s guideline recommending at least 14 days to review an agreement is an industry recommendation, not a general statutory waiting period. Allow sufficient time to assess the new agreement when taking over an existing business, too.

3. Review the business’s history, liability by liability

A revenue statement alone is not enough. Ask for an up-to-date list of debts, an aged receivables report, tax documents and records showing the commitments affecting the business. Have an accountant reconcile the figures with the general ledger and available supporting documents.

The equipment you are buying may not belong to the seller. It may be leased, hired or owned by a supplier. Have ownership, any encumbrances and the right to continue using it checked. For stock, examine expiry dates, saleability and whether it can be returned to suppliers; its book value may not reflect its actual value.

List prepaid services, gift vouchers, customer deposits and unresolved complaints separately. These could result in costs after the takeover even though the seller received the related revenue. Your financial settlement with the seller must take customers’ existing rights into account.

For employees, check employment contracts, outstanding pay and other entitlements, and leave records. Under the Hungarian Labour Code, taking over an economic unit may trigger a transfer of employment rights and obligations to the new employer; the label given to the transaction does not determine this on its own. Do not assume you can employ everyone on new terms without an employment law review.

4. Link payment to a verifiable handover

It is worth setting conditions that must be met between signing the contract and completing the handover. These might include the franchisor’s written consent, putting the necessary contractual arrangements in place, discharging specified encumbrances and preparing an agreed inventory. Also specify what happens if any condition is not met by the deadline.

Agree clear rules for calculating and settling the purchase price. If the value of stock or other current assets may change, specify the valuation method and the date used for the calculation. Discuss with a lawyer whether to retain part of the purchase price or arrange other security against specifically identified risks. These are not automatic buyer rights: they must be agreed.

At handover, prepare a written record covering the inventory, the condition of equipment, keys, system access and outstanding matters. Identify who will help resolve any discrepancies that emerge during the first few days.

Practical takeaway: only complete the takeover once the sale and purchase agreement, the franchisor’s approval and the itemised handover list all align. The value of an established business lies not just in its past turnover, but also in your ability to continue operating it lawfully.