Both buying and selling a franchise is a big decision to make and the parties involved should ensure that they have considered all the legal issues at hand. This article will focus on legal considerations for the seller. In general, the seller should only act with the consent of the franchisor and follow the necessary steps set out in the franchise agreement.
1. Review the Franchise Agreement
A review of your franchise agreement when you have made the decision to sell is crucial to ensure that you follow any specific procedures outlined by the franchisor. Franchise agreements will generally have a clause that sets out when and what the franchisor should be told and any necessary fees that the franchisee has to pay. For example, some franchisors may require a written offer surrendering the benefit of the franchise agreement to the franchisor. Failing to follow the necessary steps may mean you have breached the franchise agreement and will be held liable.
It is useful to note that most franchise agreements will also contain a clause outlining the franchisor’s right of first refusal if the franchisee wants to sell.
2. Consent of Franchisor
Many franchise agreements will include a clause that only permits the assignment of the franchise with the consent of the franchisor. Usually, this will not be an issue however, complications may occasionally arise when the franchisee wishes to sell due to lack of cooperation from the franchisor. The Franchising Code of Conduct states that a franchisor may withhold consent for the sale of a franchise although they cannot do so unreasonably. If a franchisor refuses to consent, the franchisee may ask for reasons, which must be reasonable. Importantly, even if a franchisor gives their consent, they can revoke it within 14 days as long as it is reasonable for them to do so. Additionally under the Code, if the franchisor does not respond within 42 days consent can be taken to have been given.
3. Transferring Employees
You should offer your employees the opportunity to continue working in the business and to maintain their employment with the buyer of the franchise. If an employee is to be transferred along with the business, ensure that the employee will be given their due entitlements as part of the transfer, and the appropriate adjustments are made at the time of settlement. For example, in the transfer of business, the buyer should recognise the employee’s sick leave, requests for flexible working arrangements and parental leave if applicable.
When you are selling your franchise business, ensure that you have reviewed the franchise agreement and are aware of your obligations under the Franchising Code of Conduct. Skipping a required step may result in breaching your franchise agreements and opening you up to legal claims from the franchisor. If you have any questions, get in touch with our franchise lawyers on 1300 544 755.