Selling your franchise network involves many steps and a lot of planning. Organising your franchise agreements and leases is a crucial part of this process.
In Part Three of this Selling Your Franchise Network series, we explain what you need to know about franchise agreements and leases in a franchise sale. This article will help you understand the importance of organising these documents and closing the deal.
The purchaser will care most about the legal arrangements for the franchise sale. They will want to know about the franchise agreements between the franchisor and franchisees. They will also want to be confident that you can transfer those agreements smoothly, since they are the main ‘asset’ of the sale.
First, the parties should ensure they have correctly signed the franchise agreements and that the agreements are up to date. When you scratch the surface of many franchise systems, there are often documentation issues. Sometimes changes happen and parties do not update the agreement. Other times, details go unconfirmed or essential documents are missing.
These are common issues, but they have a big impact on the sale process. Each complication or problem with a franchise agreement potentially diminishes the value of your business. Therefore, it is essential to have adequate systems in place to record every franchise recruit. This ensures the franchise agreement is enforceable for both parties.
Well-organised and well-presented documentation is a crucial part of the sale process. Ensuring that you can easily assign the franchise agreements upon sale adds value to your business.
If your franchise network requires premises from which to operate, you will need to think about how the leases will be dealt with in your franchise sale.
Often, you or an associated company will have signed leases. You then sub-license (or license) these leases to your franchisees, allowing them to operate from the premises. Sometimes, one of your directors has to sign a personal guarantee in order to secure a lease for the premises.
You will eventually need to assign these leases to a new entity created by the purchaser. This will be a long and involved process; it often requires contacting dozens of separate landlords.
In some instances, the best outcome is for the purchaser to agree to you assigning the leases over time. This may involve the purchaser providing appropriate guarantees to get the assignments over the line.
However, despite the complicated nature of this process, the purchaser will want to know a number of things for sure. They include whether:
- the leases are actually in place;
- you have issued renewal notices; and
- rent is paid up to date.
Again, having appropriate documentation and effective systems in place will ensure everything progresses as smoothly as possible. In contrast, if you do not document the leases properly, are missing renewal notices, or franchisees are late with rental payments, this could hamper, or even jeopardise, the sale process.
Even if your franchise is profitable, this does not mean your network is in a saleable condition. Organising your franchise agreements and leases will mean the purchaser has full faith in their decision. Good head office practices, such as professional franchise recruitment and leasing arrangements, will pay off come sale time. If you need assistance in organising your franchise agreements and leases in a franchise sale, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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