Franchising: setting rules for transfers and changes of ownership

Anyone turning an existing business into a franchise network needs to plan for an often-overlooked possibility: a franchisee may want to sell their business. Setting rules for transfers and changes of ownership in advance helps avoid improvised negotiations, service disruption and conflicting expectations. Choosing the right initial franchisee is not enough: you also need to plan for a potential change of operator without compromising business continuity.

1. Distinguish what is being transferred

Selling an outlet does not automatically mean transferring the franchise agreement. Before drawing up your rules, distinguish between at least three situations:

• Transfer of a business or part of it: the person or entity operating the business through its organised assets changes.
• Transfer of the franchise agreement: the franchisee’s contractual position is transferred, subject to the applicable conditions.
• Sale of shares in the franchisee company: the contracting party may remain the same, while ownership or control changes.

These transactions do not necessarily have the same effects. A clause dealing only with the transfer of the agreement may not adequately cover a change of corporate control.

In Italy, the specific legislation is Law No. 129 of 6 May 2004, governing commercial franchising. Article 3 requires the agreement to be in writing, failing which it is void, and expressly to state the conditions for renewal, termination or any transfer.

Matters not covered by this specific legislation fall under the Italian Civil Code. In particular, transferring an agreement and taking over contracts as part of a business transfer are governed by different rules. Ask a lawyer to check how your clauses should work with the proposed transaction: do not assume either that the incoming operator automatically takes over the agreement or that the franchisor can always prevent this.

2. Make the assessment of the incoming franchisee predictable

The franchisor has a legitimate interest in checking that the incoming operator can run the business. However, the outgoing franchisee needs to understand how the proposed transfer will be assessed. Approval described simply as being “at the franchisor’s discretion” leaves too much room for operational uncertainty and potential disputes.

Put a procedure in place with clear, relevant criteria that are applied consistently. These may include:

• sufficient financial resources to buy and sustain the business;
• any professional qualifications required;
• willingness to complete the required training;
• organisational skills and involvement in day-to-day management;
• acceptance of the contractual obligations applicable to the transfer.

Specify who receives the application, which documents are required and when an application is considered complete. Also set response times and a process for requesting further information, without presenting contractual deadlines as statutory requirements.

Keep the assessment of the candidate separate from price negotiations. Approval of the new franchisee should not be presented as confirmation of the business’s value or future profitability. Explain this distinction to both parties in writing.

3. Clarify the financial terms and contractual arrangements

Before the seller and buyer make binding commitments, they need to know what will happen to the franchise relationship: will the existing agreement continue, or will a new one be signed? These are not equivalent options, particularly in terms of the remaining contract term, required investment and financial conditions.

If a new agreement is to be signed, bear in mind the requirement under Article 4 of Law No. 129/2004: the prospective franchisee must receive a complete copy of the agreement to be signed, together with the required annexes, at least thirty days before signing. For a straightforward transfer of the existing agreement, have the disclosure obligations checked against the chosen transaction structure rather than assuming that changing the name on the document is enough.

Also prepare a breakdown distinguishing between:

• the purchase price of the business, negotiated between the seller and buyer;
• any transfer fees payable to the franchisor;
• any training or refresher training costs that will apply;
• investment needed to bring the outlet up to the required standards;
• outstanding debts, receivables and supply arrangements to be settled.

No new fee should emerge only at the end of negotiations. If you charge a transfer fee, explain when it applies and which services it covers. An allocation of responsibilities agreed between the seller and buyer does not automatically release the seller from obligations to third parties: the relevant checks and any necessary consents are still required.

4. Prepare the operational handover

Even an approved transfer can disrupt service if there is no handover plan. Appoint a contact at the franchisor and prepare a checklist of tasks to complete before the change of management.

Check system access, permission to use the brand, access to up-to-date manuals, training and supplier relationships. Review the lease, staffing and administrative requirements separately with the relevant professional advisers: the franchisor’s approval does not replace these steps.

Also establish who will handle outstanding orders, returns, appointments, vouchers and pre-existing complaints. For customers’ personal data, check the conditions and arrangements for its transfer: do not treat the customer database as an asset that can be handed over freely without considering data protection requirements.

Finish with a written handover record setting out what has been handed over, outstanding tasks, responsibilities and dates. In practice: before welcoming your first franchisee, prepare a route for their potential successor too. Clear transfer rules help protect continuity across the franchise network.