If your franchisee tells you that they wish to sell their franchise business, you may be wondering what procedure they should follow. Typically, the franchise agreement sets out how the sale should take place. Therefore, the franchise agreement will largely impact how your franchisee will transfer their rights and obligations (under the franchise agreement) to the purchaser. This article outlines three steps your franchisee may follow to ensure they sell their business in accordance with the franchise agreement.
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1. Notify the Franchisor
Your franchisee must request your written consent if they wish to sell their franchise business. Furthermore, under the Franchising Code of Conduct, a franchisee must provide you with all of the information you require to make an informed decision about the sale. In any event, you can ask your franchisee for further information. Then, you will need to provide a written reply to your franchisee detailing whether you consent to the sale and any conditions that apply.
Furthermore, you may withhold consent if you have reason to believe that the purchaser:
- cannot meet their financial obligations as a franchisee or any other reasonable requirements under the franchise agreement;
- does not meet your selection criteria or does not agree to follow the franchise agreement; and
- has not had the chance to read and understand the franchise agreement.
If you do not respond to your franchisee’s request within 42 days, the law presumes that you have given consent. For this reason, it is important to respond to your franchisee’s request promptly.
2. Follow The Franchise Agreement
A good franchise agreement will explain how the sale of a franchise business will take place. Selling a franchise is quite different to selling an ordinary business. This is because the sale of a franchise business involves transferring the rights and obligations from your current franchisee to the purchaser.
Alternatively, the sale may be an asset sale, whereby the business assets are sold from the outgoing franchisee to the incoming franchisee. Often, the incoming franchisee will enter into a new franchise agreement with the franchisor as a condition of sale.
In most franchise agreements, franchisors will impose certain conditions for when the sale of the franchise business arises. These conditions often include your:
- right to approve the purchaser of the franchise business according to certain criteria;
- franchisee’s obligation to pay an assignment fee or upgrade equipment;
- right to require a purchaser to enter into the current form of the franchise agreement; and
- right of first refusal.
If a franchisee fails to comply with the terms in the franchise agreement, they could breach their obligations. If you believe a franchisee has breached the franchise agreement, you should speak to a lawyer.
Continue reading this article below the form3. Get The Documents Prepared
There are several documents your franchisee will need to complete the sale of your franchise. The franchisee is usually responsible for organising these documents, however, as a franchisor, it is helpful to have a good understanding of the sale process.
Deed of Surrender and Release
The deed of surrender and release allows your franchisee to leave the franchise agreement. The deed also allows a new agreement to come into place.
New Franchise Grant
It is possible to ‘assign’ the rights and obligations of the franchisee (pursuant to a franchise agreement) from one party to another. Doing so will replace the current franchisee with the purchaser. However, it is more common in practice for franchisors to require an incoming franchisee to enter into a new franchise agreement. This means you will need to complete a typical grant and fulfil the relevant disclosure requirements.
Sale of Business Agreement/Asset Sale Agreement
The sale of business agreement is the document that makes the purchaser the new owner of the franchise. The franchisor is not typically party to this agreement. Although, the new deed and grant will instead govern the relationship between the vendor and purchaser.
Lease Assignment
If the franchise business operates on leased premises, a lease assignment may be necessary to transfer the lease to the purchaser. The transfer will depend on who signed the lease. For example, if:
- your franchisee held the lease, the landlord will need to assign the lease to the purchaser; or
- you hold the lease, your franchisee must sign the sub-lease or licence (since you will need to release the franchisee through a deed of assignment and surrender).
Key Takeaways
If a franchisee wants to sell their franchise business, they should:
- notify you in writing;
- follow the processes set out in the franchise agreement; and
- organise several legal documents to ensure the sale goes according to plan.
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Frequently Asked Questions
If a franchisee wants to sell their business, the deed of surrender and release allows them to leave the franchise agreement. A deed of surrender and release can also release a franchisee from any obligations they would ordinarily hold under their sub-lease or licence.
You may withhold your consent if it is reasonable to do so. For example, you may withhold consent if you have reason to believe that the proposed purchaser cannot meet their financial obligations as a franchisee. You should make these reasons clear in your written response to your franchisee’s request.
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