Buying a franchise: what if the franchisor transfers the agreement?

When you buy a franchise, you also choose a network and a business partner. But the party presenting the concept may not be the one responsible for the relationship throughout the contract term. Before signing, you should therefore examine the franchisor’s right to transfer the agreement: who can take over, which obligations transfer with it, and what say do you have?

1. Distinguish between a change of ownership and a change of contracting party

Start by distinguishing between two situations. If shares in the franchisor’s company are sold, the company normally remains the same legal entity and your contracting party. A change of ownership is therefore not, in itself, the same as transferring the franchise agreement to another company.

If, however, another company is to take over the franchisor’s position under the agreement, questions arise about the transfer of rights and obligations. A right to receive payment is not the same as an obligation to provide training, advice or development of the franchise concept. Ask a lawyer to assess what the clause in question actually permits.

Look for headings such as assignment, transfer, change of contracting party, restructuring and change of ownership. Also read any provisions on engaging other companies to provide services. Having someone else carry out the work does not necessarily mean that responsibility towards you has transferred.

Ask the franchisor to explain how the agreement works in three scenarios:

• The company gets new owners but retains the franchise business.
• The franchise agreements are transferred to another company within the same group.
• The concept and agreements are sold to an external buyer.

Make a note of the answer you receive for each scenario. A general promise that “everything will carry on as usual” does not tell you who will be responsible.

2. Check what consent you are giving in advance

A transfer clause may mean that, by signing, you are already agreeing to a future change of contracting party. Check whether that right is unrestricted or subject to conditions. Do not assume you will have an opportunity to refuse when a transfer is proposed.

In particular, check whether the agreement distinguishes between transfers within the group and transfers to an outside party. Even an internal transfer can matter if the new company has different resources or a weaker financial position.

Ask for clear answers to the following questions:

• Must you be informed before the transfer, and if so, when?
• Is your written consent required in any circumstances?
• Must the new party meet specific requirements concerning financial standing and expertise?
• Must the recipient expressly assume all obligations towards you?
• Is there a contractual right to end the relationship if the conditions are not met?

These are matters to address in the agreement, not rights you should take for granted. If the franchisor will not accept a requirement for your consent, you can propose objective conditions for the transfer and a clear notification process. The conditions should specify what must be satisfied, rather than simply stating that the recipient must be “suitable”.

3. Establish responsibility for both existing and new commitments

It is not enough for the agreement to continue if it is unclear who must deliver services already paid for or promised. Make a list of commitments that could be outstanding when the contracting party changes: remaining initial training, prepaid services, agreed support for opening the business and ongoing work to remedy shortcomings.

Then ask who will be responsible for each item after a transfer. Pay particular attention to how existing claims and disputes will be handled. Do not assume that the previous franchisor remains liable or that the new one automatically accepts all earlier commitments.

Consider this scenario: you have paid for a support package to be delivered during your first year of trading. After a few months, the agreement is transferred. Who must provide the remaining support, and against whom would you bring a claim if it is not delivered?

Also check whether a transfer comes with a requirement to sign a new agreement. A change of contracting party and a change to fees, the contract term or other conditions are separate matters. Ask your lawyer to check that the transfer provision does not create unclear scope to change your obligations at the same time.

4. Make use of the disclosure requirements before you buy

Sweden has a specific Act (2006:484) on Franchisors’ Duty to Disclose Information. It requires the franchisor, in good time before the agreement is entered into, to provide clear, comprehensible written information about the meaning of the agreement and any other matters necessary in the circumstances.

Ask for any far-reaching right to transfer the agreement to be explained in the pre-contractual information, particularly if it could have significant financial consequences for you. Request concrete examples of how the provision is intended to work and compare the explanation with the wording of the agreement.

The disclosure legislation does not, however, itself give you a general right to veto future changes of contracting party. The agreement and general rules of contract law, including the Swedish Contracts Act, are important. Nor is there a special registration requirement solely because a company operates a franchise business. Registration of the new party is therefore not a quality assessment of the franchise relationship.

Practical takeaway: Do not sign until you know when the agreement may be transferred, which conditions the recipient must meet and who is responsible for earlier promises. Negotiate your safeguards before giving consent in advance.