Buying a Franchise in the UAE: Can You Use the Business as Security for the Purchase?

Your franchise purchase plan may look complete: you contribute some capital, a loan covers the rest, and the business provides security for the borrowing. But owning the equipment does not mean owning the brand, and taking security over the business does not automatically give a bank the right to operate it under that brand. When buying a franchise in the UAE, you need to match what the lender will accept as security with what you actually own and what your agreement permits, before committing to purchase fees.

Separate ownership of the outlet from rights to use the brand

Start with a detailed list of the assets and rights you will acquire. These may include equipment, furniture, stock and rights associated with the premises, alongside a contractual licence to use the brand and operational know-how. These elements differ in how they can be used as security or transferred. Do not treat them as a single asset that you own without restrictions.

When buying an existing outlet, ask the seller for evidence of ownership and invoices for the equipment, along with any lease or finance agreements. A key machine may belong to a leasing company or be subject to an existing lender’s rights. Equally, do not include the trade mark among your assets simply because the outlet uses it: a licence to use it is not the same as ownership.

Create a table showing, for each item, its owner, evidence of ownership, existing restrictions, whether it can be offered as security, and any consent required. Then share it with both your bank and your lawyer. The aim is to identify early on the difference between the value of the business as a going concern and the value of the assets the lender can actually rely on.

Understand the UAE’s security framework and applicable rules

The UAE has no standalone federal law governing franchising as a separate type of contract, nor a franchise-specific federal disclosure regime requiring a standard disclosure document or a generally applicable pre-signing period. The relationship is governed by general rules, including the Civil Transactions Law and the Commercial Transactions Law, with intellectual property legislation and other laws applying according to the nature of the business.

Federal Decree-Law No. 50 of 2022, issuing the Commercial Transactions Law, is directly relevant to mortgages over a commercial business. Article 39 requires a transaction transferring ownership of the business or creating a right in rem over it to be notarised or authenticated in accordance with the competent authority’s procedures and entered in the commercial register; otherwise, it is void. A private undertaking signed by you and the lender is therefore not enough where these formalities are required.

Article 46 requires the mortgage agreement to include a statement by the debtor declaring whether the seller has a preferential claim over the mortgaged business, as well as the name of the business’s insurer, if any. Article 47 also provides that registration preserves the preferential right for five years and is deemed cancelled if it is not renewed within that period. Assign clear responsibility for tracking renewal rather than leaving it to memory.

Do not assume that every form of security follows the same procedure. Mortgaging the business as a whole may differ from taking security over particular equipment or movable assets. Ask which legal framework, register and procedures apply to each proposed security arrangement. If the relationship is registered as a commercial agency, Federal Law No. 3 of 2022 regulating commercial agencies must also be considered, without assuming that it automatically applies to every franchise.

Align the bank’s conditions with the franchisor’s consent

The franchise agreement may prohibit pledging contractual rights or creating security over business assets without written consent. It may also treat certain actions by the lender as an unauthorised transfer of rights. Read these clauses before accepting a finance offer, so that you do not take out a loan requiring security that your agreement prohibits.

Ask the franchisor for written clarification on three points: whether the proposed security is permitted, the limits on the rights the lender may exercise, and how a default would be handled. Consent to borrowing alone does not mean consent to transferring the brand licence or allowing another party to operate the outlet.

Discuss the possibility of a direct agreement between you, the franchisor and the lender, covering matters such as:

• Notifying the lender of a material breach before terminating the franchise, within agreed limits.
• Giving the lender an opportunity to remedy specified financial defaults without automatically becoming the operator.
• Conditions for accepting a suitably qualified replacement operator if necessary.
• How use of the brand would be handled during any authorised transition period.

These are negotiated arrangements, not rights guaranteed by law to every lender or franchisee. They should be consistent with the agreement, enforcement procedures and applicable rules.

Test whether the financing works before completing the purchase

Ask the bank to value the security under two scenarios: the outlet continues trading under the brand, or the right to use the brand ends. The value accepted by the bank may fall if only equipment and fixtures remain available for sale. Do not base your ability to complete the purchase on a valuation that assumes the continuation of rights whose transfer the franchisor has not approved.

Before completion, draw up a checklist of consents, documents releasing any existing security, steps for notarising or authenticating and registering the new security, and the costs of valuation, insurance and legal procedures. Agree the sequence for drawing down the loan, paying the seller and completing the formalities, as well as what happens if an essential condition cannot be met.

The practical takeaway: Do not just ask the bank, ‘How much will you lend?’ Also ask, ‘What will you take as security, do I own it, and am I allowed to offer it?’ Do not complete the purchase until the bank’s, franchisor’s and your lawyer’s answers align and are clearly documented.