In Short
- Selling a franchise territory requires franchisor approval and strict compliance with the franchise agreement.
- Buyers must meet the franchisor’s financial and operational criteria and usually sign a new franchise agreement.
- Territory sales involve detailed documentation and ongoing obligations after settlement.
Tips for Businesses
Before selling a franchise territory, review your franchise agreement carefully and plan for the franchisor approval timeframe. Make sure all fees and obligations are up to date, as these are common pre-conditions to approval. Buyers should review any new franchise agreement terms closely, as they may differ from the seller’s existing arrangements. Engaging a franchise lawyer early can help avoid delays and reduce risk for both parties.
Selling a franchise territory represents a significant business transaction that requires careful navigation of complex contractual obligations. Unlike selling an independent business, franchise territory sales involve three parties: the seller, the buyer, and the franchisor. The franchise agreement governs a key aspect of this process alongside the business sale contract, and franchisees must understand their obligations before initiating a sale. This article examines the key contract requirements that franchisees and prospective buyers must address when transferring franchise territories in Australia.
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Territory Transfer Rules
Franchise agreements typically include specific provisions that restrict or regulate territory transfers. All franchisors can reserve the right to approve any proposed sale, and franchisees cannot simply transfer their rights to another party without following prescribed procedures and meeting reasonable requirements. The franchise agreement will outline whether the franchisor permits territory sales at all, as some agreements prohibit transfers entirely or limit them to specific circumstances.
Common transfer requirements include:
- ensuring the prospective purchaser meets the franchisor’s criteria for operational experience and financial assets;
- requirements that franchisees must not be in breach of the franchise agreement at the time of the proposed transfer;
- requirements that franchisees have no outstanding amounts owing to the franchisor, including unpaid fees, marketing contributions, or other financial obligations; and
- agreement to pay a transfer fee.
Franchisor Approval Requirements
Franchisors maintain significant control over who can join their network, and approval requirements form a critical component of territory sale contracts. The franchisor will assess whether the proposed buyer meets financial, operational, and character standards established for all franchisees. Buyers typically must demonstrate sufficient capital not only to purchase the territory but also to sustain operations and meet ongoing franchise obligations.
Franchisors assess the buyer’s business experience, management capabilities, and understanding of the franchise products or services. Many franchisors require buyers to attend discovery days, meet with existing franchisees, and demonstrate commitment to the brand’s values and operational standards.
Franchisors cannot unreasonably withhold approval, but they maintain broad discretion to reject buyers who fail to meet objective criteria. The franchise agreement should specify the timeframe within which the franchisor must respond to transfer applications, typically ranging from 30 to 60 days. Sellers should factor this approval timeline into their sale negotiations and contract completion dates.
Buyers must also agree to execute a new franchise agreement or formally assume the existing agreement’s obligations. Franchisors often use territory sales as opportunities to update agreement terms to current standards, which may include different fees, territory definitions, or operational requirements. Prospective buyers should carefully review these terms before committing to the purchase.
Franchisors have an obligation to ensure there is a reasonable opportunity for the buyer to obtain a return on their investment required by entering into the franchise agreement. This means that franchisors need to consider the purchase price paid to the seller (along with any other related capital expenditure) and the remaining term of the franchise agreement. Franchisors may offer longer terms for the new franchisee (if possible) or withhold approval if the length of time on the contract is limited due to other circumstances (such as a lease).
Continue reading this article below the formTerritory Sale Documentation
Territory sales require extensive documentation that satisfies both franchise agreement requirements and general commercial law principles. The primary document is the business sale agreement between the seller and buyer, which outlines the purchase price, payment terms, settlement date, and conditions precedent. This agreement must align with franchise agreement provisions and typically makes the sale conditional upon franchisor approval, completion of training and the cooling-off right being waived or not used.
The franchisor will likely require the buyer to enter into a new franchise agreement and will provide the necessary disclosure documents to the buyer as required under the Franchising Code of Conduct (Code). This includes providing the buyer with a copy of the franchise agreement, disclosure document, the information statement for prospective franchisees, and a copy of the Code at least 14 days before signing.
The franchisor may also require the selling franchisee to execute additional documents to formalise their exit from the franchise system. These typically include a deed of surrender and release, which formally terminates the seller’s rights and obligations under the original franchise agreement and releases both parties from future claims. The franchisor may also require releases from the seller’s guarantors to ensure they are no longer liable for obligations under the surrendered agreement.
If there is a premises used for the franchised business, then, depending on whether it is leased by the franchisor or franchisee, additional documents to grant the prospective buyer the right to use the premises will need to be prepared. Third-party consents can be required for physical sites, plus any finance or equipment rental contracts.
Post-Sale Obligations
Territory sales do not end at settlement. Both parties face ongoing obligations that extend beyond the transfer date. Sellers typically must provide transition assistance to help buyers understand operational procedures, customer relationships, and territory-specific practices – although a franchisor may choose to manage this process themselves. The franchise agreement or sale contract may specify the duration and nature of this training period, commonly ranging from one to four weeks.
Sellers will also generally remain subject to restraint of trade provisions that prevent them from competing with the franchise system or soliciting its customers. These restraints typically apply for specified periods and within defined geographic areas.
Key Takeaways
Franchise territory sales involve complex contractual requirements that demand careful attention from all parties. Franchisees must navigate transfer rules, obtain franchisor approval, prepare comprehensive documentation, and fulfil post-sale obligations. Understanding these requirements before initiating a sale prevents delays, disputes, and potential breaches of contract. Both sellers and buyers should engage experienced franchise lawyers to review agreements, conduct due diligence, and ensure compliance with all contractual obligations throughout the transfer process.
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Frequently Asked Questions
No. Franchise agreements usually require franchisor approval before a territory can be sold. You cannot transfer your rights freely. The franchisor will assess the proposed buyer against set criteria and may impose conditions such as payment of transfer fees and clearing outstanding obligations.
A territory sale typically requires a business sale agreement, franchisor approval, and new franchise documentation for the buyer. The franchisor must also provide disclosure documents under the Franchising Code of Conduct. Sellers may need to sign deeds of surrender, releases, and property or lease-related documents.
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