Buying an Existing Franchise in the UAE: Checking Debts Before Acquisition

Buying an operating franchise outlet may seem easier than setting up a new one: the premises are fitted out, staff are in place and customers know the brand. But the liabilities you take on may matter more than what you see on site. In the UAE franchise market, a well-managed acquisition starts by establishing exactly what you are buying in legal terms, then examining the debts and third-party rights that could affect operations after handover, rather than simply accepting the seller’s assurance that ‘everything has been paid’.

First, establish whether you are buying the company or the business

There is a fundamental difference between buying shares in the company that operates the outlet and buying the business or specified assets. In a share purchase, the same company continues to exist, with its rights and liabilities intact; a change of ownership does not erase its debts or past breaches. Due diligence should therefore extend beyond the outlet if the company carries on other activities or operates additional sites.

Buying the business or its assets requires a precise list of what will transfer: equipment, stock, the trade name where transferable, contracts, deposits and other items. Do not assume that labelling the deal an ‘asset purchase’ automatically protects you from every historical claim. The outcome depends on the nature of the transaction, the applicable legal rules and the contracts involved.

Ask your lawyer for a short memorandum identifying the seller, the legal owner of each asset and the liabilities you will assume. Also check whether the seller actually owns the equipment, leases it or obtained it from a supplier that retains rights over it.

Understand the UAE rules governing the transfer

The UAE has no standalone federal law dedicated to franchising, nor a general federal disclosure regime specifically governing franchise sales. The relationship is governed by civil and commercial rules, alongside trade mark and competition legislation where relevant. Federal Law No. 3 of 2022 on the Regulation of Commercial Agencies may apply if the relationship meets its requirements and is registered under its provisions; not every franchise agreement is automatically a registered commercial agency.

For the purchase of an existing business, Federal Decree-Law No. 50 of 2022 Issuing the Commercial Transactions Law contains important provisions. A transaction transferring ownership of a commercial business, or creating a right in rem over it, must be notarised or authenticated by a notary public, in accordance with the competent authority’s procedures, and entered in the commercial register. Otherwise, it is void.

Do not therefore treat signing a private sale agreement and handing over the keys as the end of the process. Ask which registration and publication requirements, and which creditors’ rights, apply to your deal structure. Also note that the Arabic term ‘haqq al-imtiyaz’, used in the provisions securing payment of the business’s sale price, refers to a creditor’s statutory priority, not the right to operate under a franchise brand.

Check debts against supporting documents, not the seller’s summary

Create a schedule linking each liability to the creditor, amount, due date, supporting evidence and the party responsible for payment. At a minimum, your checks should cover:

• The franchisor: overdue royalties and fees, disputed amounts and any unresolved notices of breach.
• Suppliers and finance providers: supply invoices, instalments, guarantees, mortgages, charges or other rights over the equipment and business.
• Employees: wages, accrued entitlements, leave and end-of-service benefits, including a review of how these must legally be handled on transfer.
• Public authorities and service providers: tax status, penalties and unpaid service and utility charges.
• Customers: deposits, subscriptions, gift cards and paid orders that have not yet been fulfilled.

Request up-to-date account statements, reconciliations against the accounting records and, with the seller’s consent, direct confirmations from the relevant parties. Customer obligations may not appear as an invoice owed to a supplier, but they could consume your stock and staff time after handover without bringing in any new revenue.

Also examine existing and potential disputes and claims. Do not equate the absence of a court judgment with the absence of a problem. A letter of demand or notice of breach may reveal a liability that has not yet been recorded in the accounts.

Link payment to settlement and the transfer of operating rights

Buying the equipment and business does not automatically give you the right to use the brand. Obtain the franchisor’s consent in the form required by the contract, and establish whether the existing agreement will transfer or you will sign a new one. Request written confirmation of any arrears and the conditions for accepting you as the franchisee, so you are not surprised to find that continued operation depends on paying the seller’s debts.

Negotiate conditions that must be met before completion, such as releasing security interests, completing transfer formalities and settling specified amounts. You can also agree that certain debts will be paid directly to creditors out of the purchase price, in exchange for appropriate settlement and release documents.

Discuss retaining part of the purchase price or using a suitable escrow arrangement to cover historical claims that emerge later. These are contractual mechanisms requiring agreement and clear drafting, not automatic rights available to the buyer. Specify the amount retained, the retention period, the conditions for release and the procedure for raising objections, rather than relying on an indemnity that may be difficult to enforce against the seller.

Make handover a documented cut-off point

Prepare a handover record confirming the stock accepted, the condition of the equipment, meter readings, open orders, customer balances and documents delivered. Set a cut-off date for allocating income and expenses, and agree how to handle invoices received later that relate to an earlier period.

The contract should make clear the seller’s responsibility for the agreed historical liabilities, along with the process for notifying and managing claims. However, your allocation of responsibility does not necessarily bind a creditor or public authority. Actual settlement, approvals and legal formalities therefore remain more important than contractual wording alone.

The practical takeaway: Do not pay for an existing outlet without a written account of what you are buying, what liabilities you are taking on and what must be settled. Make completion conditional on documentary evidence and the transfer of rights, not simply the handover of keys.