Buying an Existing Franchise: Secure the Right to Take Over

Buying an existing franchise can give you a business with customers, staff and established procedures. But the seller’s business and the right to operate within the franchise network are two separate things. Before committing, you need to ensure that the business purchase and the franchise agreement work together – and that you are not paying for a business you have no right to continue operating.

1. Establish exactly what you are buying

Start by distinguishing between a share purchase and an asset purchase. In a share purchase, you buy the shares in the company that operates the business. The company remains the same legal entity and normally remains a party to its contracts. However, this does not mean that the franchisor must accept a change of ownership without reviewing it: the franchise agreement may contain provisions on changes of ownership or control.

In an asset purchase, your company buys selected assets, such as equipment and stock. The seller’s franchise agreement does not automatically transfer with them. You need to establish whether the agreement can be transferred or whether you must enter into a new agreement with the franchisor.

Ask the seller to provide the signed franchise agreement, all amendments and any specific consents. In particular, check:

• Which company is a party to the agreement?
• Is approval required for a transfer, a change of ownership or a change in the person responsible for running the business?
• Are there provisions giving the franchisor a preferential right to buy the business?
• Are there any personal exemptions that apply only to the current owner?

Have a lawyer assess the proposed structure before deciding how to buy. The distinction affects both the obligations you take on and the approvals you need.

2. Obtain the franchisor’s decision before the purchase becomes binding

The seller’s assurance that transfers “usually go smoothly” is no substitute for a decision from the franchisor. Make direct contact early and ask for a written explanation of the approval process.

Ask what requirements you must meet as the buyer, which documents you need to submit and who has authority to make the decision. Ask for a timetable too. If training, finance or a particular organisational structure must be in place, this needs to fit with the planned completion date.

At the same time, clarify whether you will take over the existing agreement or be offered a new one. A new agreement may have different terms from those on which the seller has built the business and based its valuation. Do not assume that the seller’s contractual terms will become yours.

The approval should identify the correct buyer, the business concerned and any conditions. A generally positive email is not necessarily final consent. Ask your adviser to check that the decision actually covers the proposed transaction.

3. Use your right to information when taking over a franchise

Sweden’s Act (2006:484) on Franchisors’ Duty to Provide Information requires the franchisor to provide clear, understandable written information about the implications of the agreement and other relevant matters well before the agreement is entered into.

This duty also applies when an existing franchise agreement is to be transferred to a new franchisee with the franchisor’s permission. You should therefore not rely solely on the seller’s presentation of the business.

The information must cover matters including financial terms, rights granted, purchasing obligations, non-compete restrictions and rules on how the agreement ends. When taking over a franchise, it is particularly important that the information matches the agreement that will actually apply to you.

The Act does not, however, give you an automatic right to be approved as a franchisee. Nor does it replace a review of the purchase agreement. General contract law, including the Swedish Contracts Act, is relevant to the parties’ agreements and undertakings. No special registration is required simply because the business operates as a franchise; ordinary business registrations and sector-specific licences or permits may still be needed.

4. Make payment and completion conditional on the right arrangements being in place

Have the purchase agreement and franchise documents reviewed together. The aim is to avoid becoming obliged to complete the business purchase before your right to operate the business has been secured.

Discuss conditions with your lawyer that make the purchase dependent on the necessary approval and an acceptable franchise agreement being in place. Set a deadline for meeting those conditions and specify what happens if approval is refused or comes with new requirements. Also set out how any deposit will be handled.

Then draw up a joint completion checklist for the buyer, seller and franchisor:

• Which documents must be signed, and when?
• Who pays any transfer or initial franchise fees?
• Are there unpaid fees or alleged breaches of contract that need to be addressed?
• From what date may the buyer operate the business under the franchise system?
• When will the necessary access to the network’s systems be activated?

Seek written clarification of any previous shortcomings and who is responsible for them. Liability may differ between a share purchase and an asset purchase, and an agreement with the seller does not automatically bind the franchisor.

Practical takeaway: Secure both what you are buying and the right to use it. Coordinate the purchase agreement, the franchisor’s approval and completion before taking on an unconditional obligation to pay.