When selling your franchise business, the business sale process is more complex than selling an independent business. Accepting an offer from a buyer for your franchise business is only the start of the sale process. In most cases, both the landlord and the franchisor will need to formally approve the buyer, which adds time to the selling process. Understanding the key steps required will help you to avoid delaying the sale. This article will outline the key considerations when selling your franchise business, including:

  • the lease assignment provisions;
  • the franchise assignment provisions; and 
  • managing the timeline of the business sale.

Common Franchise Leasing Arrangements

In many franchise businesses, the franchisor will identify a suitable location for each new franchise business and enter into the lease agreement directly with the landlord. This is also the case when a franchisor sets up a fully operational corporate store and runs the business for a short time before eventually selling the existing business to a franchisee.

Whether you bought a new or existing business, there are a number of common leasing arrangements which may apply to you. These include the:

  • franchisor finding suitable premises, holding the lease as tenant and granting you a licence to occupy the premises;
  • franchisor approving the premises you select to lease and, once approved, you hold the lease directly as lessee;
  • current franchisee holding the lease and transferring it to you. You are again directly responsible for the lease with the landlord.

For example, many gym franchisees find their own premises when setting up. They then negotiate the lease agreement with the landlord and hold the lease themselves. 

If you hold the lease as the lessee, you should understand the lease transfer process when selling your franchise business.

Franchise Lease Assignment

It would be an easy mistake to assume that where the business is changing hands, all operational requirements also automatically pass to the buyer. There can be a misconception that having both parties mutually agree to the key terms of the sale ensures that the business will then be transferred to that buyer on payment. 

However, there is a formal process to transfer the lease to the buyer, which typically involves:

  • a request for the landlord’s consent in writing;
  • the proposed assignee providing reasonable information related to their financial standing and business experience;
  • providing the proposed assignee with a copy of the disclosure statement;
  • paying a transfer fee to the landlord to cover their administrative costs in assessing the suitability of any proposed assignment; and
  • that you must not transfer the lease without the landlord’s consent.

Speak to the landlord as soon as you find a buyer. Once you have accepted a formal offer from the buyer, this could be a good time to ask them to prepare documents which demonstrate good financial standing and briefly collate some information about their previous business experience.

Where the franchisor holds the lease, you will not have to transfer the lease to the buyer. Instead, once they have received formal approval, the franchisor can simply issue the buyer with a new licence to occupy the premises.

Standard Franchise Assignment Provisions

You will also need to liaise with the franchisor to confirm the terms of the formal takeover. Once you have found a buyer, you can manage the initial discussions with the franchisor by clarifying whether the buyer will be entering into a new franchise agreement with the franchisor or taking over the duration of your franchise agreement. 

Intellectual Property

Your franchise agreement will commonly provide you with the right to use the franchisor’s intellectual property (IP) to run the business during the franchise term. This will include IP such as the franchisor’s:

However, in the context of selling your franchise, understand that this is a non-transferable right and it is often considered ‘prohibited’ conduct for a franchisee to try to assign the franchisor’s intellectual property to a third party.

Business Name

A franchisee will typically register the business name for a new franchise at the time of purchase, so this may be yours to transfer to the buyer. 

However, you must obtain the franchisor’s consent.

Obtaining Franchisor Consent

You must not transfer or attempt to transfer your rights and interests in the franchise business without applying for the franchisor’s consent through a formal process.

The franchisor will usually consent to transfer the terms of your franchise agreement to a buyer and prospective franchisee if you provide sufficient information to demonstrate that the buyer:

  • meets the Franchisor’ selection criteria; 
  • has appropriate business experience;
  • is solvent; 
  • is likely to meet their financial obligations under the franchise agreement; and
  • provides any guarantees and indemnities the franchisor reasonably requires.

The common time frame for the franchisor to provide consent is 21 days.

Failing to obtain the consent of the franchisor can jeopardise the sale, causing the buyer to not have the rights to operate under the franchise brand.

Practical Steps You Can Take

As you are selling your franchise business rather than an independently owned business, you will need to liaise with the franchisor in addition to the landlord. While the timeline for each business sale will vary, there are some common, practical steps you can take to prepare for the sale of your franchise, including to:

  1. communicate with the franchisor as soon as you have plans to list the business for sale;
  2. ask each buyer questions to understand what their financial expertise is and what business experience they bring to the role;
  3. request the purchaser provide you with documents which demonstrate their financial standing and prior business experience;
  4. communicate with the landlord as soon as you have accepted an offer;
  5. understand the assignment provisions in your lease and franchise agreement; and
  6. provide notice in writing to the franchisor and landlord as early as is practical.

Case Scenario One: Buyer Refused Consent From the Landlord

It should be sufficiently clear from the way the assignment process is structured that the buyer must obtain the required approval from the landlord and franchisor. On occasion, the buyer may not receive approval from either the landlord or the franchisor. Here, if you have the lease directly with the landlord, it is your responsibility to obtain the landlord’s consent.

If the franchisor has the lease, whether the landlord needs to be notified is a matter for the franchisor. This is provided that the franchisor approves and transfers the licence to occupy to the new franchisee.

If you have the lease directly with the landlord, most leases restrict the situations where the landlord can withhold their consent to a buyer.

Transfer Provisions

Some of the standard lease transfer provisions include specific situations in which the landlord can withhold consent.

For example, where the:

  • buyer proposes to change the use of the premises;
  • financial resources or retailing skills of the buyer cannot be demonstrated;
  • financial resources or retailing skills of the buyer do not match up to the level or standard of yours;
  • lessee has not complied with the required process of seeking landlord consent as set out in the lease agreement.

If you have accepted a formal offer from a buyer that is well equipped to take over the business, it would be very disappointing to hinder or cause delay to the lease transfer. As such, you must comply with these strict requirements when it comes to seeking consent from the landlord.

Additionally, another benefit of complying with the landlord requirements set out in your lease is that it becomes possible to obtain the implied consent of the landlord after sufficient days elapse from the time you provide notice in writing. Common time frames for obtaining landlord’s implied consent vary depending on the type of lease and may be after:

  • 42 days in standard commercial leases; or 
  • 28 days in retail commercial leases.

These protections ensure that a landlord cannot ‘hold up’ the sale beyond these time frames without providing you with one of the reasons for withholding consent as permitted under your lease agreement.

Case Scenario Two: Buyer Refused Consent from the Franchisor

Your franchise agreement will often allow the franchisor to withhold their consent for a range of reasons, including where you are in breach of the agreement.

Some examples of a breach which may hold up a business sale include:

  • being behind on payment of franchise fees; or
  • selling products or services outside the approved range of products and services. 

This is the last opportunity for the franchisor to recoup any outstanding fees or correct any issues related to the way their business brand is represented. You can expect the franchisor will invoke their right to require you to remedy any breaches in accordance with the franchise agreement.

To avoid causing delays to the business sale process, you should address the issue of any outstanding fees or franchisee action points from the time you list your business for sale and notify the franchisor you wish to sell and confirm the conditions.

Managing the Franchise Sale Timeline

One way to manage the timeline of the sale is to know when you can initiate talks with the landlord or franchisor about the sale.

Many franchisees will be interested in closing the sale as soon as possible after you have accepted an offer from a buyer. However, when planning the timeline of the sale, be mindful that the purchaser will want to use this period to:

  • obtain advice on the sale of business agreement before signing;
  • conduct their own due diligence check;
  • request changes to the terms set out in the sale of business agreement;
  • obtain advice on the franchise documents and apply to the franchisor for consent; and
  • obtain advice on the lease agreement and apply to the landlord for consent.

Accordingly, it can realistically take at least a few weeks until the purchaser is in a position where they are ready to sign the sale of business agreement.

If there is a delay in obtaining the consent of the landlord and franchisor, this can cause an additional delay of over a month. This delay can occur either due to:

  • you not following the formal process required; 
  • the buyer not being able to demonstrate their financial standing or relevant business experience; or
  • the landlord being uncooperative or otherwise unresponsive.

You should take this into account when timing a sale, and you should be prepared for hurdles along with the way, so you are not frustrated or confused by the process.

Key Takeaways

When selling a franchise business, it is important to understand the expectations of your landlord and franchisor to move the business sale forward. Once you have found a buyer and accepted their offer, it is important to obtain legal advice on what your lease agreement and franchise agreements require by way of obtaining the required consents from your landlord and franchisor, respectively.

Through initiating conversations with all parties as early as possible, you can avoid unnecessary delays to the business sale timeline. If you take practical steps to follow all formal processes required when it comes to transferring your lease and franchise agreement, you can better manage the business sale timeline. If you have any questions on the business sale process, contact LegalVision’s franchising lawyers on 1300 544 755 or fill out the form on this page.

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