If a franchisee’s business is not doing well or they wish to pursue other ventures, they may wish to sell their franchised business. However, under most franchise agreements, you, as the franchisor, may have the option to buy back the business’ assets. Nevertheless, some complications can arise if you do not act per the franchise agreement. This article explores some considerations you should make during a franchise buy back and how you can avoid them.
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When Does a Franchise Buy Back Occur?
A franchise buy back will usually occur when the:
- franchise agreement comes to an end; or
- franchisee breaches the franchise agreement, and you want to terminate the agreement and subsequently buy back the equipment.
There are generally no issues when it comes to determining when a franchise agreement comes to an end. Generally, most franchise agreements will contain a finite term with an end date. If the franchise agreement does not provide for any renewal of the franchise agreement, it will expire on the end date of the term within the franchise agreement.
However, some issues can arise if your franchisee breaches the agreement and you want to terminate the agreement.
When Does a Breach Occur?
A breach occurs when a franchisee fails to do something specified in the franchise agreement. If a franchisee breaches the agreement, you must issue the franchise with a formal breach notice.
While the Code does not define a reasonable period, a reasonable amount of time is usually a month or less.
If this period expires and the franchisee has not taken steps to remedy the breach, you should issue them a termination notice.
Continue reading this article below the formWhat Happens to the Business Premises Upon Termination?
Where the franchised business operates from leased premises, what will happen to that lease and the franchisee’s ongoing occupation will depend on whether the franchisee:
- held the lease to the premises; or
- was the sub-lessee or licensee of the business premises.
Below, we will explore each scenario in more detail.
Your Franchisee Holds the Lease
If the franchisee holds the lease directly with the landlord, the franchisee may be required to assign it back to the landlord upon terminating the franchise agreement. You can usually achieve this through a step-in deed. However, the franchisee may be able to retain the store if:
- if the landlord declines to assign the lease; and
- there is no right of assignment arising under a step-in deed.
This may allow your franchisee to debrand and begin operating the same or a different business.
However, you may be able to prevent this if your franchise agreement contains a restraint of trade clause. Depending on the content of the clause, you can exclude franchisees from operating a business:
- for a specific period after the franchise agreement ends; and
- in a specific geographical area.
However, you may be unable to enforce a clause that imposes an unreasonable restraint. Unreasonable restraint of trade clauses go beyond protecting a legitimate business interest. For example, if your franchise system operates in NSW, but the restraint applied to all of Australia, this would likely be unreasonable. Before you enforce a restraint of trade clause, you should seek legal advice.
You Hold the Lease
If you hold the lease and sublet or license the business premises to your franchisee, you can likely remove your franchisee from the business premises once the franchise agreement ends. In this scenario, you may be able to continue to operate the business. Although, you may have to compensate your franchisee for the equipment.
What Happens to the Franchise Equipment Upon Termination?
As a franchisor, you may want to buy back your outgoing franchisee’s equipment to:
- start the franchise in that location or a separate location;
- grant the franchise to a third party to continue operations; or
- stop your franchisee or a competitor from opening up a competing business.
In most franchise agreements, you have the right of first refusal. This means you have the right to purchase the business assets before your franchisee can offer the sale to anyone else.
Typically, you only have to purchase the equipment from your franchisee for the written-down or reasonable value. This is the price the franchisee paid for the equipment minus the depreciation. Otherwise, the franchise agreement might mandate an independent valuer to calculate the value of the equipment.
Key Takeaways
A franchise buy back can occur in various scenarios. For instance, it can occur when the:
- franchise agreement comes to an end; or
- franchisee breaches the franchise agreement, and you want to terminate the agreement and subsequently buy back the equipment.
In this instance, where a breach occurs, you should issue your franchisee with the appropriate breach notice. If the franchisee fails to remedy the breach and you provide notice of termination, you should then consider how to:
- manage the lease of the franchise business premises; and
- buy back the franchise equipment.
If you have questions about franchise buy back, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A franchise buyback occurs when a franchisee wants to sell their business, and the franchisor has the option to buy back the business’s assets under the franchise agreement.
A restraint of trade clause can prevent franchisees from operating in competition with the franchise system after the franchise agreement has ended.
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