If you are a franchisee, you may run your business with a business partner. Unfortunately, owning a franchise business with a business partner does not always work according to plan. Ongoing responsibilities to the business and franchisor, investment costs and commercial realities can sometimes force the partnership to come to an end. If this happens, it is important to understand your legal options and obligations. This article will discuss the key considerations to think about if the time has come to part ways with your franchise business partner.

How Do We Own the Franchise?

The first step is to identify how you and your partner are currently operating the franchise. There are multiple ways to run a franchise, and how you should end the partnership will depend on how you have structured your business.

Common ways to jointly own a franchise include:

  • being directors in a single proprietary limited company (i.e. Pty Ltd);
  • being directors in a company acting as a corporate trustee (i.e. an operating trust);
  • having a dual company structure (i.e. using a holding and operating company); and
  • as individuals in a partnership.

Operating a franchise through a company is the most common method. Therefore, this article will discuss what to do assuming this is the business structure you are using.

Should We Transfer the Company or Sell the Franchise Business?

If you and your business partner are parting ways, you will need to divide business assets and income to reflect what each of you put into the business. It is important to understand the difference between selling a company and selling a franchise.

Selling a company involves transferring ownership of the shares in the company from existing shareholders to new or existing shareholders. As a result, who has control of the company and its assets changes.

Selling a franchise business involves transferring the right to operate that franchise (along with relevant equipment, intellectual property and business information) to another business operator.

Is Changing Ownership of the Company a Transfer?

Either you or your business partner may wish to leave the company completely while the other stays on as director and shareholder, in which case the existing company continues to operate the franchise.

However, a common clause in standard franchise agreements may make this difficult. A change in control clause will require you to seek approval from the franchisor before making any legal or effective changes to the ownership or control of the business.

If your franchise agreement contains this clause, you may need to get written consent from the franchisor before you can transfer control of your company to your business partner or a third party. Some franchise agreements state that you must seek consent from the franchisor before transferring more than a certain percentage of control of the company.

Your franchise documents may also set out fees for transferring ownership of the franchise. These fees may be given as a:

  • set value; or
  • percentage of value tied to the price of the transfer.

Some franchisors may have different fees depending on how long you have owned the franchise.

For example, the fee may be 50% if the transfer occurs in the first year of operation, 30% in the second year, and only 20% in the third year.

Exceptions may apply if the transfer is between business partners, so you should consult your franchise agreement and seek legal advice.

How Do We Sell the Franchise?

If you and your business partner are both leaving the business, you may look to sell the franchise business entirely. This means that your company will be selling the right to operate the franchise, usually to another company.

An important provision in your franchise agreement to look out for is whether you must offer to sell your franchise back to the franchisor before anyone else. This is referred to as the franchisor’s ‘right of first refusal’.

If this is the case, the franchisor has the right to say ‘no’ to purchasing your franchise before you approach another buyer in the market.

When you find a prospective purchaser of the franchise, you will likely need to obtain consent from the franchisor to sell the franchise. The sale contract will usually list this as a condition of sale.

What Other Legal Transfers Are Required?

If you are selling the business or transferring it to your business partner, another purchaser of even the franchisor, there are other important items to think about. For example, you should:

  • appropriately assign the lease to whoever is taking over the premises if you have signed one;
  • transfer any licenses (e.g. for software) to the new business operators;
  • correctly list any equipment borrowed in your individual name under the new owners’ names; and
  • ensure that you adequately transfer responsibility to the appropriate person if you are the borrower or guarantor of a loan.

Continuing Franchise Obligations and Personal Guarantees

If you are leaving the company or the franchise business, you should ensure that you are aware of any continuing obligations.

For example, you may face restrictions that continue even after exit. Understanding these restraints is key if you intend to operate similar businesses or work in the same industry.

Finally, if you provided a personal guarantee when entering into the franchise, it is important to seek legal advice and ensure you correctly remove or manage any ongoing responsibility.

Key Takeaways

If you are ending your business partnership, it is important to understand how the change in control of the business affects your required actions under the franchise agreement. You should:

  1. know your business structure;
  2. understand the differences between a change in ownership of a company and selling a franchise;
  3. ensure that you receive consent from the franchisor if necessary; and
  4. be diligent in understanding and modifying any other legal agreements such as leases, licenses, loans or personal guarantees.

Navigating this process can be challenging. You should seek expert legal advice to ensure you take all necessary steps. If you have any questions about separating from your Franchise business partner, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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