Transferring a franchise business: prepare for a franchisee’s change of ownership

When turning an existing business into a franchise network, it is easy to focus solely on recruiting your first franchisees. Yet before signing the first agreement, it is worth answering this question: what happens if a franchisee later wants to sell their outlet or business? A change of ownership does not necessarily mean closure or termination of the agreement. With well-designed rules, operations can continue while protecting the brand, customer relationships and the interests of the network.

1. Be clear about exactly what is changing hands

“I’m selling my franchise business” can describe several legally distinct situations. Do not cover them all with a single generic transfer clause in the agreement.

• Sale of shares or an ownership interest: the franchisee company remains the contracting party, but its ownership changes.
• Sale of assets and business operations: another business takes over assets such as equipment and stock. This does not automatically make it a franchisee.
• Transfer of the agreement: a new party replaces the existing franchisee under the franchise agreement through an appropriate legal arrangement.

For ownership changes, also specify which events require notification and which require prior consent. The sale of a minority stake and a transfer of effective control do not necessarily warrant the same procedure.

Practical task: map out the possible changes within your own business. Identify who owns the brand, who contracts with franchisees and which changes would actually affect the person responsible for operations. This can form the basis of the definitions used in your future agreements.

2. Turn Hungary’s legal framework into specific rules

Hungary has no standalone franchise act, but it would be incorrect to say that franchise agreements are not specifically regulated. Act V of 2013, the Hungarian Civil Code, contains specific provisions on franchise agreements. General contract rules also apply, as do company law provisions when ownership changes.

There is no general regulatory registration requirement exclusively for franchise systems, nor a mandatory, standardised pre-contractual disclosure document. This does not, however, remove the duties to cooperate and provide information during negotiations. The European Code of Ethics for Franchising is a self-regulatory standard, not Hungarian legislation; it may be relevant, for example, through association membership or a contractual commitment.

A sale of shares or an ownership interest does not, in itself, transfer the franchise agreement. If a new business is to replace the franchisee, however, the transfer of the contractual position must be dealt with separately. Assigning a receivable does not transfer the entire franchise relationship.

Ask a lawyer to review the change-of-ownership clause and the agreement transfer procedure separately. Rights to use the brand, trade secrets, and any transfer of employees or customer data may require further legal review. The sale of the business does not, in itself, provide unrestricted authority in these areas either.

3. Make the approval process clear in advance

The franchisor has a legitimate interest in ensuring that a suitable person continues to run the business. The franchisee has a legitimate interest in keeping their business saleable. A predictable procedure can reconcile these two interests.

The contractual process should cover at least the following:

• when the intention to sell must be notified and what information must be provided;
• which financial and professional criteria you will assess in the prospective owner;
• when you will consider the submitted documentation complete;
• how quickly you will respond and how you will request any missing information;
• how you will explain a refusal and how any dispute will be handled.

Do not settle for wording such as “the franchisor may withhold consent at any time”. It is better to use predefined criteria linked to the operation of the business: adequate funding, the necessary management involvement, completion of training requirements and acceptance of contractual obligations.

At the same time, assessing the new owner should not become a disguised renegotiation of the agreement. Clarify in advance whether the relationship can continue on the existing terms, or when a new agreement will be required. This may also affect the price the seller can ask for the business.

4. Make handover costs and responsibilities predictable

A change of ownership may involve costs for reviewing documents, training or switching IT systems. Do not announce these afterwards as a single, unexplained “transfer fee”. Specify which services are being charged for, how the charges are calculated, who pays and what happens if the transaction falls through.

Deal separately with existing debts and security arrangements. When shares or an ownership interest are sold, the company’s obligations generally do not disappear because its ownership has changed. Nor does the seller’s personal guarantee necessarily end automatically; its treatment must be expressly clarified.

The handover checklist may include obtaining the necessary consents, completing training, changing access permissions and settling accounts. Do not promise an unconditional start while, for example, the legal right to occupy the business premises remains uncertain.

5. Test the process before signing the first agreement

Run a desk-based simulation: imagine that your first franchisee finds a buyer who wants to continue operating the business through a different company. Who receives the notification? Who assesses the applicant? Who authorises use of the brand, and when does the buyer gain access to operational know-how?

Prepare a short responsibility table setting out each task, the person responsible, the required document and the conditions for completion. By handover day, it should be clear who runs the business, who issues invoices, who handles complaints and whom staff can contact. Do not expect a signed agreement alone to ensure continuity.

Practical takeaway: prepare a change-of-ownership procedure alongside your first franchise agreement. Distinguish the sale of the company from the transfer of the agreement, and make the approval criteria, costs and responsibilities clear in advance.