Business Transfer and Succession Terms to Check Before Joining a Franchise in Japan

When considering a franchise in Japan, look beyond day-to-day operations after opening: check who could take over the outlet in future, and on what terms. Health issues, family succession or a sale to a third party may mean a change of ownership or management while the business continues trading. To pass on the value you have built as part of a franchise network, you need to review both the franchise agreement and the related contracts.

Distinguish selling the business from transferring the franchise agreement

Even if you can sell the outlet’s equipment and stock, your rights and obligations under the franchise agreement do not automatically pass to the buyer. Under Japan’s Civil Code, transferring a party’s contractual position to a third party generally requires the other party’s consent. Start by looking for clauses headed ‘prohibition on assignment’, ‘transfer of contractual position’ or ‘succession’, and identify which actions require the franchisor’s approval.

In particular, do not treat the following arrangements as interchangeable.

• Business transfer: Transferring the business and assets such as equipment to a third party, with the transfer of each contract arranged separately.
• Share transfer: Changing the shareholders of the franchisee company. Although the company remains the contracting party, some agreements require the franchisor’s approval for a change of control.
• Family succession: The points to check differ depending on whether this involves handing over a sole trader’s business or changing the representative of a company.

Incorporating after joining as an individual also needs checking, because the contracting party changes. Do not assume that ‘family members can take over freely’ or that ‘selling the company does not require approval’. Explain your intended succession arrangement clearly and ask the franchisor about it.

Clarify the franchisor’s approval criteria and procedures

A clause stating only that ‘the franchisor’s prior written consent is required’ does not tell you how feasible a future transfer will be. Discovering the conditions only after finding a buyer could stall negotiations or delay the handover.

Before joining, check at least the following points.

• What funding, experience, qualifications and involvement in running the outlet must the successor have?
• What documents are needed for the assessment, and what is the usual process leading to a decision?
• Will the existing agreement be transferred, or must the successor sign a new franchise agreement?
• If a new agreement is required, which version of the terms will apply to matters such as its duration and fees?
• Does the franchisor offer a buyer introduction scheme, or does the agreement give it a preferential right to buy the business?

If there is no deadline for a decision, ask how the response date will be agreed once all the documents have been submitted. If the answer is ‘we decide on a case-by-case basis’, ask which factors are assessed and what circumstances typically lead to refusal.

Also consider what would happen if the operator suddenly became unable to attend the outlet. Checking whether a family member or store manager could run it temporarily during the succession assessment, and who would liaise with the franchisor, can reveal issues that a routine sale process might overlook.

Consider succession costs for both seller and buyer

Even where a transfer is permitted, high succession costs can make it harder to find a buyer. Check not only your own costs but also any initial franchise fee, assessment fee or training costs the successor would have to pay. This does not mean such charges necessarily apply: you need to establish whether each agreement provides for them and how they are calculated.

Prepare a schedule showing the ‘cost item’, ‘person responsible for payment’, ‘recipient’, ‘amount or calculation method’, ‘payment trigger’ and ‘treatment if the transfer falls through’. If the franchisor charges a fee for introducing a buyer, check exactly what triggers the obligation to pay it.

Clarify whether any security deposit will be returned to the outgoing franchisee, transferred to the successor or replaced by a new deposit from the successor. Any deductions for unpaid amounts, and the timing for finalising the balance, also matter.

The sale price is not the amount you will necessarily keep. Estimate the proceeds after deducting transfer-related costs, debt repayments and tax liabilities, and have the figures checked by a tax adviser or another appropriate professional. If the transfer could trigger a requirement to replace equipment or carry out similar work, include those requirements in your estimate too.

Review the related contracts needed to keep the outlet running

Even with the franchisor’s approval, you may be unable to continue trading from the same location if the premises lease cannot be transferred. Assigning a lease generally requires the landlord’s consent. If you rent the premises from the franchisor, review the sublease as well as the franchise agreement.

The franchisor’s approval alone will not necessarily allow equipment leases, loans or payment service contracts to be transferred to a new contracting party. A handover checklist such as the one below can help ensure that you consult everyone involved.

Area to check	Key points
Premises	Landlord’s consent, whether a new lease is needed, treatment of the deposit
Equipment and leases	Ownership, what can be transferred, treatment of outstanding balances
Borrowing	Discussions with lenders, conditions for repayment or assumption of debt
Employees	Treatment of employment contracts under the chosen transfer method, procedures for providing information and obtaining consent
Licences and permits	Whether transfer procedures or new applications are required, relevant authority to contact

The procedures required will vary depending on whether the arrangement is a business transfer, a share transfer or another form of succession. Although you may not be able to settle every procedural detail while considering a franchise, it is useful to identify whose consent will be needed. When a transfer actually takes place, seek professional advice on how the transfer agreement should address a failure to obtain consent from the franchisor, landlord or other relevant parties.

Understand Japan’s rules and put verbal assurances into writing

Japan does not have a single comprehensive law governing all franchises uniformly. However, Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors operating a ‘specified chain business’ as defined by the Act to provide prospective franchisees with written information before signing, including an outline of the business and the main contract terms, and to explain that information. Even in retail and food service, coverage depends on whether the statutory requirements are met.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also apply to franchise transactions, not just those in retail and food service. Franchisors and franchisees are independent businesses, and their dealings are subject to the Antimonopoly Act. However, a clause requiring the franchisor’s approval for a transfer is not automatically unlawful. The specific terms, their application and any resulting disadvantage need to be examined.

These rules do not guarantee franchisees the freedom to sell their business or pass it on to family members. Assessing whether succession is possible requires a review of both general legislation, such as the Civil Code, and the individual contracts.

A practical step before joining is to summarise the intended successor, approval process, costs and contracts to be transferred on a single sheet. If the sales representative’s explanation does not match the contract, ask for the wording to be amended or the agreed points to be recorded in a written agreement before signing. The key is not simply to accept that ‘you can pass the business on’, but to establish ‘to whom, on what terms and exactly what can be transferred’.