Converting a Company-Owned Outlet into a Franchise in the UAE

Converting an outlet you own and operate into a franchisee-run business could be your first step towards building a franchise network around your brand. But this involves more than changing the operator’s name or signing a franchise agreement: it may combine the sale of a business, the transfer of assets and the grant of rights to use the brand and operational know-how. Success starts with separating these transactions, then coordinating their completion around a clearly defined handover date.

1. Define what you are selling and what rights you are granting

Start with a written list of the transaction’s components before negotiating the price. Will the franchisee buy the existing business, including its tangible and intangible assets, or only specified equipment and stock? Will the business continue at the same premises, or will new arrangements be needed with the landlord and relevant authorities? The label you give the contract does not, on its own, determine the legal nature of the transaction.

Divide the list into three groups:

• Assets whose ownership will transfer: such as equipment, furniture and stock, after checking their ownership, condition and any third-party rights over them.
• Rights granted for use: such as the trade mark, operational know-how and systems, within the limits of the franchise agreement rather than as assets sold outright.
• Relationships requiring separate arrangements: such as the lease, service contracts, technology subscriptions and existing obligations to customers.

For example, selling a restaurant’s fixtures and fittings does not mean selling the brand displayed on its frontage. Similarly, handing over a point-of-sale terminal does not automatically transfer the software licence or payment processing contract. Identify the owner of each item and document how it will transfer or remain available for use.

2. Understand the difference between registering the sale and governing the franchise

The UAE has no standalone, comprehensive federal franchise law, nor a uniform franchise-specific federal disclosure regime requiring all franchise agreements to be accompanied by a disclosure document within a specified timeframe. Depending on its nature, the relationship is governed by general contract rules under the Civil Transactions Law, the Commercial Transactions Law, trade mark legislation and other relevant laws. Federal Law No. 3 of 2022 Regulating Commercial Agencies may also apply if the relationship meets its applicability and registration requirements.

Selling the outlet as a commercial business, however, is subject to rules that should not be confused with the franchise agreement. Article 39 of Federal Decree-Law No. 50 of 2022 Issuing the Commercial Transactions Law requires a transaction transferring ownership of a commercial business to be notarised or authenticated before a notary public in accordance with the competent authority’s procedures, and entered in the commercial register; otherwise, it is void. The sale particulars must include separate prices for the tangible and intangible assets, the amount paid and the arrangements for paying the balance.

Article 40 links the transfer of ownership to entry in the commercial register and publication of a summary of the transaction in accordance with the prescribed procedures and time limits. Ask a legal adviser to determine whether your transaction constitutes the sale of a commercial business or the sale of individual assets, and what is required to complete it. Also, do not confuse the statutory preferential right securing payment of the business sale price with a franchise based on licensing a business model: the Arabic term used for both can be similar.

3. Separate the asset price from the franchise fees

Give the buyer a breakdown that makes clear what they are paying for. The price of equipment and stock is not the fee for joining the franchise network, and ongoing fees should not appear to be instalments towards the outlet’s purchase price unless that is intended and expressly stated in the contract.

Prepare a financial schedule setting out:

• The price of each asset category and how its condition will be checked.
• How stock will be counted and valued at handover, excluding damaged and unsaleable items.
• The franchise fees, the services they cover and their due dates.
• Deposits and advance payments, and how they will be settled.
• Which party is responsible for obligations arising before and after the handover date.

Pay particular attention to gift vouchers, prepaid orders, customer deposits and customer credit balances. Agree who will fulfil the relevant service and bear its cost, while respecting customer rights and mandatory legal requirements. Allocating responsibility between the parties does not automatically extinguish third-party rights.

Have a tax adviser review the transaction’s tax treatment based on its substance. Do not assume that the sale of an operating business is always treated in the same way as the sale of individual pieces of equipment.

4. Carry out a handover that establishes the new operator’s independence

Set a clear cut-off date for management responsibility, receipts and expenditure, and make it conditional on completing the necessary procedures, not simply handing over the keys. Check with the relevant licensing authority what is required to change the owner or operator, or to issue the appropriate licence. Initial approval to establish a business is not permission to start trading.

Prepare a handover record covering the asset inventory, equipment identification numbers and condition, meter readings, accepted stock, keys and digital access permissions. Handle employee records, data and existing contracts in accordance with the relevant laws and approvals, rather than assuming they all transfer with the outlet.

Before the final handover, run an operational rehearsal led by the franchisee: opening for the day, receiving a delivery, handling a complaint and closing the accounts. The aim is not to test the business concept again, but to confirm that the new operator can take responsibility without hidden reliance on the previous owner’s team.

Practical takeaway: Treat the conversion as two connected processes: legally transferring what is being sold, and licensing what remains the franchisor’s property under a clear franchise agreement. Do not hand over operations until the asset schedule is complete, liabilities have been settled and the handover record has been approved.