Transferring Franchise Ownership: A Guide to the Agreement

Before franchising an existing business, prepare for the day when a franchisee wants to sell their outlet or pass it on to a family member. A verbal promise that “it can be transferred” is not enough. A franchise network needs a clear process to protect the brand, the franchisee’s investment and the service customers expect.

1. Define what counts as a transfer

Selling equipment, transferring franchise rights and changing control of a company are different things. The company named in the agreement may remain the same, while the people actually making decisions and running the business have changed. Your policy should cover changes that materially affect the relationship between the parties.

Before drafting the agreement, list the situations that require prior written consent:

• Selling the entire outlet together with the franchise rights.
• Replacing the individual or company that is party to the franchise agreement.
• Changing control of the company that holds the franchise.
• Passing the franchise to an heir following the franchisee’s death.
• Appointing an interim manager when the owner can no longer oversee the business.

Do not automatically treat every change of manager as a transfer. Distinguish routine staffing changes from changes in ownership or control. If a percentage threshold applies to changes in ownership, have a lawyer define it clearly; do not rely on vague wording such as “a substantial change”.

2. Align the policy with the applicable law

There is no general law in the Philippines called the “Philippine Franchise Act of 1995”. Republic Act No. 9178 concerns Barangay Micro Business Enterprises, not franchising.

There is, however, specific regulation: Executive Order No. 169, series of 2022, sets minimum terms for franchise agreements involving micro, small and medium-sized enterprises. It also directs the Department of Trade and Industry (DTI) to establish a register of agreements and places registration responsibilities on franchisors. Have a lawyer review the requirements and confirm the applicable procedure with the DTI, including how to handle a new agreement following a transfer.

The Civil Code is also relevant to the validity of contracts, the fulfilment of obligations and the replacement of contracting parties. Republic Act No. 8293, or the Intellectual Property Code, is relevant to the use and licensing of the brand. Buying an outlet’s equipment does not, in itself, transfer permission to use the brand.

An association’s voluntary code, such as that of the QFA, provides guidance on ethical conduct and clear obligations. It is not a substitute for the law or a legal review of the agreement.

3. Establish a fair approval process

Approval should not be automatic, but neither should it depend on the brand owner’s changing preferences. Set criteria that can be explained and applied consistently.

You may assess the proposed incoming franchisee’s financial capacity, the time they can devote to the business, their management experience and their willingness to complete the required training. Specify which documents are needed and when the review of a complete application will begin.

Also set out the following in writing:

• Who will receive and decide on the request.
• The deadline for a response and the procedure for requesting missing documents.
• Reasonable grounds for refusal.
• Whether a transfer fee applies, how it will be calculated and what work it covers.
• Whether the remaining term of the existing agreement will continue or a new agreement must be signed.

If you want the first opportunity to buy the outlet, clearly define how that right works, the response period and the basis for the purchase terms. Avoid turning this right into an indefinite obstacle to a reasonable sale by the franchisee.

4. Prepare for the actual handover of responsibilities

Approving the buyer does not mean the transfer is complete. Draw up a checklist of tasks to finish before the handover date: signing documents, completing training, taking stock, settling accounts and obtaining the landlord’s consent where necessary.

Clarify who will be responsible for existing debts, outstanding orders, customer advance payments and obligations to employees. These liabilities do not automatically disappear when ownership changes. Nor can all permits, leases or supplier agreements simply be transferred.

Set an exact date for the transfer of operational control, reporting duties and responsibility for franchise payments. Revoke or update the outgoing franchisee’s access to the outlet’s systems. Record which obligations the outgoing franchisee will retain and which they are expressly released from.

Practical summary: Before taking on your first franchisee, draw up a written transfer policy and have it reviewed alongside the franchise agreement. It should be easy to establish who can take over, how they will be approved and exactly when responsibility will pass to them.