Today in our Franchise Lawyer Special series: I own a franchise with my partner; we are separating, what should we do?

Separating and having to work out your assets and liabilities c an be a difficult and tedious process. If you own a franchise together, one of your concerns might be – what do I do with our business now?

The franchisee is usually a company. If you own the franchise business together, you would (normally) be operating the franchise business together as directors of the company. If that’s the case, then you have the following options available to you:

  • continue the business as is;
  • transfer the business to either party; or
  • sell the business to a third party.

Continuing the business

If you and your partner separate amicably, and the business is doing well, you may consider continuing the business and maintaining a working relationship. However, whilst this option is available, it can be wrought with logistical and emotional problems and is not always recommended.

Transferring the business

In the process of separation and division of assets, either you or your partner may wish to resign as a director, and the transfer the franchise from you to your partner, or vice versa.

Usually in a standard franchise agreement, it will provide that you cannot change the legal or beneficial ownership or control of the franchise business, and you are not allowed to transfer, assign or otherwise deal with the franchised business without the written consent of the franchisor. You should note that a transfer between partners still constitutes a transfer, which requires the consent of the franchisor.

The transfer fee should also be set out in your franchise agreement. This is either a set amount, or a percentage of the value that will be received by the franchisee for the transfer. The percentage is usually higher if the transfer occurs in the first year, and decreases pro-rata over time. For example, it may be 50% if the transfer occurs in the first year, 30% in the second year, and only 20% in the third year. The franchise agreement may waive such transfer fees in the event you transfer your interest to your partner in the franchise business.

Selling the business

If neither you nor your partner wants to have sole ownership of the franchised business, you may agree to sell it altogether.

You must first obtain the written consent from the franchisor which cannot be unreasonably withheld. You should always review the terms of the franchise agreement in relation to your rights to sell the franchise business.

There is generally a set procedure for franchisees who want to sell their franchise. The franchise agreement usually provides that the franchisor has first right of refusal to purchase your franchise business.

To conclude

Separation can be a long and painful process for both parties. If you and your partner held assets and ran a business together, it can make the process even more complicated. To simplify this process in relation to any franchise business you jointly own, you should always consult with a franchise solicitor. Your lawyer will be able to discuss your legal rights and obligations with you and work out your options, having regard to your situation and best interests.

Felix McKnight

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