Buying a Franchise in Venezuela: Protection Against Hidden Liabilities

Buying an existing franchise means taking on a business with a history. An outstanding claim, an undocumented commitment or a pre-existing obligation may emerge after payment. In franchise transactions, due diligence helps identify risks, but it does not replace contractual protections. This guide explains how to negotiate who is responsible for liabilities that were unknown at the time of purchase, and how to ensure that responsibility is backed by financial security.

1. Define what you are buying and who should be responsible

Before negotiating protections, distinguish between acquiring shares or ownership interests in the operating company and buying specific assets of the outlet. In the first case, the company retains its obligations even though its owners change. In the second, the contract must identify the assets, rights and obligations included in the purchase. Even then, statutory liabilities may apply despite being excluded from the agreement.

Simply stating that ‘the buyer does not assume any pre-existing debts’ is therefore not enough. That allocation of responsibility may be effective between the parties, but it will not necessarily prevent claims by employees, authorities or other third parties protected by law.

You should also identify the right party to hold responsible. The seller of the outlet and the franchisor may be different parties. The franchisor’s approval of the purchase does not mean it guarantees the seller’s information or will pay for any hidden liabilities.

Work with your lawyer to prepare a simple table covering each risk, when it arose, the responsible party, the evidence available and the proposed protection. This will help you avoid asking the franchisor to give warranties about matters that are the seller’s responsibility, or leaving the franchisor’s own commitments without adequate backing.

2. Turn assurances into contractual representations and warranties

Venezuela has no comprehensive franchise-specific law or general mandatory pre-contractual disclosure regime equivalent to the franchise offering circular required in some other countries. The relationship is governed mainly by the Civil Code and the Commercial Code, alongside applicable mandatory rules, including those on employment, tax, industrial property and competition.

The absence of a specific law does not mean there is no protection, or that the parties are free to agree anything they wish. Contractual protections must be drafted in accordance with Venezuelan law and cannot override statutory liabilities towards third parties.

Ask for the seller’s relevant assurances to be incorporated as representations and warranties, supported by schedules. Depending on the business, these could cover:

• The completeness of the records and documents provided.
• A list of known litigation, claims and proceedings.
• Confirmation that there are no undisclosed commercial commitments affecting the outlet.
• Details of customer advance payments, outstanding refunds and services paid for but not yet provided.
• Any notices of breach received from the franchisor.

Avoid absolute statements that nobody can verify. If the seller introduces wording such as ‘to the best of their knowledge’, define whose knowledge counts and what checks they must carry out. Identify exceptions expressly: handing over a folder of documents should not replace a clear list of disclosed potential liabilities.

3. Agree an indemnity you can use

A representation describes a state of affairs; an indemnity sets out the financial consequences if it proves false or a covered liability arises. The two must work together.

Negotiate what triggers the obligation to indemnify: for example, an inaccurate contractual statement or a claim attributable to events before the agreed cut-off date. Distinguish between a known potential liability, which may require specific cover, and one that is unknown at signing.

The mechanism should specify:

• Covered losses: amounts payable, reasonable defence costs and any other expressly agreed items.
• Procedure: how notice must be given, which documents are required and the opportunity to respond.
• Defence of third-party claims: who controls the defence and when consent is needed to admit liability or settle.
• Limits and time periods: how long cover lasts, financial caps and any exceptions, all subject to legal review.

Do not confuse the contractual deadline for making a claim with the statutory time limits applicable to each obligation. Nor should you accept a general cap that makes protection against an already identified potential liability ineffective. Your lawyer should ensure these provisions work together and check their validity.

4. Secure the promise to pay

An indemnity may be difficult to recover under if the seller distributes the sale proceeds and is left without assets. Consider retaining part of the purchase price, deferring payment or obtaining additional security suited to the circumstances. There is no universally appropriate percentage: it should reflect the documented risk and the seller’s ability to meet their obligations.

If you agree a retention, specify who holds the money, when it is released, how a pending claim is handled and what happens to any undisputed amount. Do not assume you can unilaterally deduct any sum: set out the procedure and the conditions that apply.

Before signing, check that the representations and warranties, schedules and financial security are consistent with one another. Practical takeaway: do not simply ask whether hidden liabilities exist. Negotiate who will be responsible, how you will make a claim and where the money will come from if they emerge.