Converting a company-owned outlet into a franchise: protect your customer contracts

When a company-owned shop or service business becomes a franchised outlet, the signage may stay the same while the company behind the customer's purchase changes. Signing a franchise agreement is not enough. Existing subscriptions, orders and advance payments also need to be clearly assigned to the responsible business. Here is a practical process for handling customer contracts when a franchisee takes over your company-owned outlet.

1. Start by identifying the customer's contracting party

First, distinguish between two different arrangements. If the franchisee buys the shares in the company operating the outlet, that company normally remains the same legal entity and contracting party. However, customer contracts may contain clauses triggered by a change of ownership, so they still need to be reviewed.

The situation is different if the business assets are transferred to the franchisee's own company. Buying equipment, stock and the business does not, in itself, mean that all customer contracts automatically transfer. Nor does the franchise agreement between you alone determine which company the customer has a contract with.

Draw up a list of existing commitments to customers. Include items that can easily fall outside the usual contract file:

• ongoing subscriptions and service agreements,
• accepted quotations and orders not yet fulfilled,
• bookings with a deposit or full payment in advance,
• gift cards, multi-visit passes and customer credit balances,
• commitments to future servicing included in earlier purchases.

Record the contracting party, the outstanding obligations, payments received and any relevant transfer clauses. Also note whether the customer is a consumer or a business, as this affects which rules need to be considered.

2. Decide which contracts can actually be transferred

Do not assume that a clause in your business transfer agreement is enough to change the supplier under the customer's contract. Assigning a right to payment and transferring an obligation to provide a service are different matters. As a general rule, replacing a contracting party with a new company that takes over its obligations requires the customer's consent, unless the contract or applicable rules provide otherwise.

Ask a lawyer to assess the different groups of contracts and divide them into three practical categories:

1. Contracts that can be transferred under existing terms. Check that those terms are valid and whether any notice requirements apply.
2. Contracts requiring the customer's consent. Decide how consent will be requested and recorded.
3. Commitments to be fulfilled by the original company. Plan who will carry out the work and whom the customer should pay.

Sweden has no comprehensive franchise legislation, but it does have the Act (2006:484) on Franchisors' Duty to Provide Information. This requires clear, written information to be provided well before the franchise agreement is signed. The information must cover, among other things, the business and its financial terms. If customer commitments being taken over affect the franchisee's finances, they need to be clearly described in the information provided to support the franchisee's decision.

The Act does not, however, transfer any customer contracts. For these matters, you also need to consider general contract law and, for consumer contracts, applicable consumer protection legislation. Treat disclosure to the franchisee and the handling of customer contracts as two separate tasks.

3. Allocate the money behind outstanding customer commitments

A prepaid customer contract may look like an asset while also involving work still to be done without any further payment coming in. The franchisee needs to understand both the scale and the cost of these obligations before agreeing to the takeover.

Suppose your company-owned outlet has sold a service package and received full payment. After the handover, several visits remain that the franchisee is expected to carry out. You need to agree how the franchisee will be paid for that work, rather than simply stating that the customer will “transfer with the business”.

Prepare a separate financial settlement schedule. It should specify:

• which prepaid commitments are covered,
• how the balance will be established on the handover date,
• what payment the franchisee will receive and when,
• how refunds and incorrect balances will be handled,
• how long adjustments for items recorded later can be made between you.

Also decide how this work will be treated when calculating franchise fees. Otherwise, uncertainty may arise where payment has gone to the original company but the work is carried out by the new one. Have an accounting professional review the settlement, bookkeeping and VAT treatment based on the actual arrangement.

Your internal allocation of costs must not be presented as automatically limiting the customer's rights.

4. Carry out a controlled transfer of contracts

Do not choose the handover date solely on the basis of when the franchisee can open the doors. Also set conditions for when the handling of customer contracts is sufficiently complete. Outstanding consents, uncertain gift card balances and unfulfilled orders each need a designated person responsible and an agreed solution.

Customer communications should be specific: which company is responsible before and after the handover, what is changing, and does the customer need to do anything? Give the correct company name and Swedish company registration number where needed to identify the contracting party. Avoid saying “everything will continue exactly as before” if the payment recipient or contractual relationship is actually changing.

Then test the handover using a few real, representative cases: an existing booking, a partly used multi-visit pass and an unpaid invoice. Can staff explain who is responsible and record the transaction correctly? Document any remaining exceptions so that customers are not passed back and forth within the franchise network.

Practical takeaway: Set the handover date only once every customer commitment has an identified contracting party, an agreed financial arrangement and a clear process for handling it. The same brand does not mean the same contract.