Turning your existing business into a franchise: what to check before joining

You can join a franchise network with an established business: you do not necessarily need to set up a new company or open a new outlet. However, you will not be starting with a clean slate. Your existing lease, stock, staff and commitments to customers will need to fit the new brand’s requirements. The key to your decision is therefore to establish exactly what you can keep, what you must change and which existing obligations will remain your responsibility.

1. Clarify whether you are simply joining or also transferring ownership

Joining a franchise does not, in itself, mean selling your business. If the same company continues to run the business, but under a new brand and operating system, your existing contracts and debts do not automatically pass to the franchisor. Nor does support from the franchisor mean that it will meet your obligations to existing creditors on your behalf.

A different assessment is needed if, as part of the agreement, the franchisor buys a stake in your company, takes over assets or another company becomes the operator. Do not treat these as simple administrative details of a rebrand: they are separate transactions with different legal and tax implications.

At your first substantive meeting, draw up a short ‘before and after’ summary covering:

• which company will operate the business;
• who will remain the tenant of the premises and the owner of the equipment;
• who will employ the staff;
• who will invoice customers;
• whether there will be any change of ownership or transfer of assets.

Give this summary to both your accountant and your solicitor. This will ensure they are assessing the same transaction, rather than inferring the changes solely from the title of the franchise agreement.

2. Compare your existing business with the brand’s requirements

When choosing a brand, look beyond how well known its name is. Ask for a site assessment and an itemised response setting out which aspects of your current operation are acceptable within the franchise network. A general statement that ‘the business is suitable’ will not reveal the true extent of the conversion work.

Prepare a comparison table showing the current position, the required standard, the changes needed and who is responsible for them. Include the layout of the premises, equipment, product range, opening hours and staff roles. Clearly distinguish between requirements you must meet by the joining date and those for which you will have a transition period.

An existing asset is not necessarily suitable for the franchise, however valuable it may be. A perfectly functional till system or recently purchased equipment may still need replacing if it cannot be integrated into the new operation. Obtain written approval for every significant asset you intend to retain.

Have your lease checked too: does it permit the proposed activity, alterations and new signage? The franchisor’s approval does not replace any necessary landlord’s consent or compliance with regulatory requirements. Nor does the fact that your previous operation was lawful automatically establish that all requirements for the modified operation have been met.

3. Resolve outstanding commitments from your existing operation

If the same company continues to operate the business, a change of brand name does not erase its existing obligations. This is particularly important for prepaid services, gift vouchers, outstanding orders and consumer claims relating to previous sales.

Create a transition register that assigns responsibility and a method of fulfilment to every outstanding matter. For example, if a customer paid for a service under the old business name, you need to establish how they will receive it under the new operating arrangements. An internal agreement with the franchisor does not, by itself, alter your obligation to the customer.

Review your existing supply, maintenance and marketing agreements as well. These may include fixed-term contracts, minimum purchase commitments or termination provisions that leave you paying for an old service alongside the new system.

Ask for a separate plan for existing stock: can it be sold under the new brand, must it be sold off separately, or is another solution needed? Do not assume that the franchisor will take over leftover stock. For staff, check whether the changes require amendments to employment contracts; handing over a new operations manual is no substitute for this.

4. Document the full costs and conditions of the conversion

Your comparison should not be based on the cost of opening a new outlet, but on how conversion would change your financial position compared with continuing your current operation. Beyond the initial franchise fee, factor in usable equipment that must nevertheless be replaced, the cost of clearing or writing off stock, ending existing contracts and any temporary closure. Only include savings where the assumptions behind them can be substantiated.

Prepare a separate cash flow forecast for the conversion. Revenue from the existing business may not fund the changes without interruption: costs may arise before the benefits of the new system materialise. If you need finance, base your funding requirements on the actual list of conversion work too.

Hungary has no standalone, comprehensive franchise law, but Act V of 2013, the Civil Code, specifically regulates franchise agreements. General contract rules also apply, including duties to cooperate and provide information during negotiations. There is no mandatory franchise disclosure document with standardised content for all franchisors, nor a general franchise-specific waiting period.

You should therefore ask for a detailed conversion plan as a schedule to the agreement, specifying which existing elements are approved, deadlines, responsibility for costs and the consequences if approvals are not obtained. Record any temporary departures from the franchise requirements too, rather than leaving them as verbal concessions.

Practical takeaway: only commit once you have an itemised picture of what you will keep, what you will replace and which existing obligations you will continue to meet at your own expense.