Franchising: check the conditions for selling the business

Buying a franchise means joining a network of independent business owners, but also taking on commitments that may affect a future sale. Before choosing a brand, check whether you can transfer the business to another owner and on what terms. Owning the fixtures, equipment and goodwill is not enough: the buyer must be able to continue trading under the brand through a valid agreement with the franchisor.

1. Distinguish between selling the business and transferring the franchise agreement

Selling the business, transferring the franchise agreement and selling shares in the company are different transactions. Do not assume they have the same effects or that permission for one automatically authorises the others.

In a business sale, the assets and legal relationships covered by the transaction are transferred under the applicable rules. In a transfer of the agreement, a new party takes the franchisee’s place in the contract. With a sale of company shares, the company holding the agreement may remain the same, while its owners change.

The franchise agreement may deal with these situations separately, including notification or approval requirements for a change of control. Simply searching for the word ‘transfer’ is therefore not enough.

Ask your lawyer to review the clauses covering shareholders, directors and changes of control too. The aim is to understand which transactions require the franchisor’s involvement and what happens if a transfer takes place without authorisation. Do not assume that selling shares lets you bypass restrictions on selling the business.

2. Check what Italian law requires

In Italy, franchising is governed by Law No. 129 of 6 May 2004, which deals with commercial franchising. Article 3 requires the agreement to be in writing, failing which it is void. It also requires the agreement to expressly state, among other things, the conditions for renewal, termination and any transfer.

This requirement for clarity does not amount to an unconditional right to transfer the agreement to anyone you choose. Whether a transfer is possible depends on the agreed terms and the rules applicable to the transaction.

The Italian Civil Code contains different rules for transferring an agreement and transferring a business. In particular, Article 1406 governs the replacement of a party to a contract involving reciprocal obligations that have not yet been performed, with the other party’s consent. Article 2558, by contrast, governs succession to contracts as part of a business transfer, subject to its own conditions and exceptions. How these provisions interact must be assessed case by case.

Article 4 of Law No. 129/2004 also requires the complete agreement and the prescribed accompanying documents to be provided at least thirty days before signing, subject to the specific exceptions set out in that provision. Use this period to clarify the terms on which you could eventually exit by selling the business.

3. Make the franchisor’s consent process clear

A clause requiring approval of a new franchisee may help protect the network’s standards. As an investor, however, you need to know how that approval process will work.

Ask for the following to be set out in writing:

• Buyer requirements: the experience, financial resources, training and day-to-day involvement required.
• Documentation: the information needed to submit a complete application.
• Response times: the timeframe for reviewing the application and any additional information requested.
• Assessment criteria: the grounds that may justify a refusal.
• Handover arrangements: whether the existing agreement will be transferred or a new agreement signed.

The last point affects the sale negotiations. If the buyer has to sign a new agreement, its duration, fees and obligations may differ from those on which you based your asking price.

Also check for any rights of first refusal or options in the franchisor’s favour: when they are triggered, what information you must provide and how long you must wait. Do not assume that silence means approval. Before accepting a binding offer, have your commitments to the buyer checked against the approvals required.

4. Calculate the net proceeds and check any remaining obligations

The price agreed with the buyer is not necessarily the amount you will be left with. Check whether the agreement provides for transfer fees, buyer assessment costs, compulsory training or upgrades to the premises. Clarify who must pay these costs and when they fall due, without assuming that every charge requested is automatically justified.

Work with your accountant to prepare a breakdown of the sale price, transaction costs, debts to be settled and tax implications. Keep costs imposed by the agreement separate from those you can negotiate with the buyer.

Finally, selling does not necessarily release you from every commitment. Have the position on existing debts, personal guarantees and obligations that survive the transfer checked. A personal guarantee, for example, should not be treated as discharged without checking its terms and, where necessary, obtaining a release from the creditor.

In practice: before buying, ask for a written explanation of how you could sell the business later. Look for an understandable process, identifiable costs and a clear route to being released from your obligations. These help you assess how transferable your investment is; they do not guarantee that you will find a buyer.