Sell A Franchise

Time to sell your franchise business?

When you sell a franchise business you must follow the process set out by the franchisor in your franchise agreement.

 

Exit A Franchise Services

The rights to sell a franchise business will depend on the terms of the franchise agreement, the operations manual and the Franchising Code of Conduct.

Your franchise agreement will contain some or all of the following obligations:

 

The Franchisor's right of first refusal

If your franchise agreement contains a right of first refusal, this means that you will have to offer the franchise business for sale to the franchisor, before you are able to sell the franchise business to a third party.

Some franchise agreements contain a set price to be paid or a "formula" for calculating the sale price, if the franchisor decides to buy the franchise business.

If the franchisor does not exercise its right of first refusal (that is, does not agree to buy the franchise business), then you will be able to sell the franchise business to a third party, subject to certain conditions.

 

Franchisor Approval

 

The sale of your franchise business to a third party ("the potential purchaser") will be subject to

  • the approval of the potential purchaser by the franchisor; and
  • the assignment of your franchise agreement to the potential purchaser or alternatively the potential purchaser entering into a franchise agreement with the franchisor.

While the potential purchaser is likely to be subject to the same or a similar approval process that you were subject to when you became a franchisee, the franchisor cannot unreasonably withhold consent or approval.

What is reasonable or unreasonable will depend on the circumstances of each case.

The Franchising Code of Conduct (the Franchising Code) sets out a number of circumstances in which it is reasonable for the franchisor to withhold consent or approval. These include if:

  • the potential purchaser is unlikely to be able to meet the potential financial obligations under the terms of the franchise agreement;

  • the potential purchaser does not meet the selection criteria of the franchisor;

  • the potential purchser does not meet a reasonable requirement of the franchisor. 

The Franchising Code also provides that if you have requested in writing that the franchisor consent to you transferring the franchise to a third party and the franchisor has not:

  • given its consent to the transfer within 42 days after the request is made; or
  • given its consent to the transfer within 42 days after the franchisor has sought any further information about the potential purchaser

the franchisor will be taken to have given its consent or approval.

If the franchisor approves the potential purchaser you will need to prepare a sale agreement for the sale of the business.

The sale agreement will need to contain conditions which are specific to the sale of a franchise. Because the franchisor owns the intellectual property used in operating the business, the sale will not include the transfer of any intellectual property. The purchaser will enter into a franchise agreement with the franchisor which allows the purchaser to use the franchisor's intellectual property. Consequently, any sale will be subject to the purchaser entering into a franchise agreement with the franchisor.

 

Other Conditions of Sale 

Apart from the approval of a potential purchaser by the franchisor, the other general conditions of selling a franchise business include:

 

Payment of all Outstanding Amounts

If there are any amounts outstanding to the franchisor under the terms of the franchise agreement or any other agreement with the franchisor, the franchisor will require these amounts to be paid before the franchise business is transferred.

 

Payment of a Transfer Fee

In addition to any amounts outstanding under the terms of the franchise agreement, if you sell your franchise business you will need to pay a transfer fee to the franchisor. The amount of the transfer fee (or the formula used to calculate the amount of the transfer fee) will be set out in your franchise agreement.

 

The Cost of Training the Purchaser

Some franchise agreements require you to pay to the franchisor the cost of training the purchaser. If your franchise agreement contains such an obligation, speak to the franchisor to find out what the training fee will be.

 

Entry into a Surrender Deed

If the purchaser enters into a new franchise agreement with the franchisor, the franchisor will require you to enter into a surrender deed, "surrendering" your rights under the franchise agreement.

After you sell the franchise business you will no longer have the right to trade under the franchisor's name or use the franchisor's intellectual property.

You will be obligated to return any operating manuals, client lists, signage and stationery.

You may also be obligated to transfer telephone numbers if those telephone numbers have been linked to the franchisor's name.

A surrender deed will usually contain a release of the franchisor from its obligations under the franchise agreement and from any claims that you may have against the franchisor.

It is likely that you will still be subject to restrictions such as confidentiality and restraint of trade. It is important that you understand these restrictions.

 

Transfer of Any Lease

If your franchise is a site based business and you hold the lease then you may be required to assign the lease to the new purchaser on the sale of your franchise.

You will need to read your lease to check any assignment or approval provisions.

Be aware that the landlord may charge a fee to approve the purchaser.

Regardless of whether the lease is assigned or the landlord enters into a new lease with the purchaser, it is important that you obtain from the landlord a release from any obligations under the lease and from any guarantees that have been entered into in relation to the lease.

You do not want the landlord to have any recourse to you if the purchaser does not comply with its obligations.

If the franchisor holds the lease then you may be required to transfer the premises licence to the purchaser (or alternatively the franchisor will enter into a new premises licence with the purchaser). Again it is important that you obtain from the franchisor a release of any of your obligations under the premises licence.

 

 

The information in this page is subject to our Terms and Conditions.

LET'S TALK

 

Contact Us