Transfer of the Franchisor’s Business: A Follow-up

In previous contributions in this section, aspects of the transfer of the company by the franchisor, ie of the franchise organization as a whole, have already been discussed. This contribution briefly discusses the concept of “franchise rights”: in practice, it sometimes happens that an acquiring party takes over the franchise rights from the selling party, while the legal entity that originally contracted with the franchisees remains with the selling party.

The legal status of such a transfer is not entirely clear. From an economic point of view, this should be regarded as an asset transaction, whereby the franchise rights should be qualified as an asset. The legal status depends in the first place on what is included in the franchise agreement itself. Most franchise agreements do offer some scope in this context, since they often stipulate that the franchisor can transfer his rights arising from the franchise agreement, provided that this does not affect the franchisee’s rights. Ultimately, however, the franchise agreements will have to be “concluded” with a new entity, for example a Franchise BV that is affiliated with the acquiring party / new franchisor. The question then is whether the franchisees are obliged to agree to this in all cases, for example by signing an extension to the existing franchise agreement.

The answer to this question essentially lies in the foregoing. In principle, the franchise rights can be transferred, specifically when this is included in the franchise agreement, provided that the rights of the franchisee are not materially affected. In other words, if the new franchisor continues the existing franchise concept seamlessly, under the existing or better conditions for the franchisees, then it can be assumed that the franchisees must agree to this. However, if the new franchisor changes the concept, for example by a name change, and wishes to implement changes in the condition system that have adverse consequences for the franchisees, the franchisees can indeed oppose the intended transfer. A consequence of this could be that the contractual counterparty of the franchisee does not change and that he therefore stays with his old franchisor, with all kinds of annoying consequences and legal puzzles as a result. It is therefore strongly recommended, when it comes to a transfer of a franchise organization, to exercise this well in advance with the franchisees, and to inform them fully about what awaits them in the new organization and, ideally, transfer in advance to obtain full agreement.

Ludwig & Van Dam franchise attorneys, franchise legal advice