If you wish to sell your franchise, you will likely require the assistance of a lawyer. Indeed, to buy or sell a franchise business, you need to consider a number of factors. This includes the requirements and obligations imposed by the Franchising Code of Conduct (the Code) which regulates the franchise industry in Australia. This article will discuss how to sell a franchise business in Australia and the components you need to consider.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
The Franchise Agreement
When purchasing a franchise, you will receive a franchise agreement which sets out both the obligations of the franchisor and franchisee. It is fairly common for the franchise agreement to prohibit the sale of the business without the franchisor’s consent. Further, the agreement may also include an option in favour of the franchisor for any proposed sale. Normally, a franchise solicitor will draft complex transfer, sale and assignment provisions into the agreement that contain various preconditions for the franchisor’s consent.
The procedure and conditions of these clauses may include:
- time and format requirements of consent requests;
- a first right of refusal clause, which gives the franchisor the right to buy back the business in the first instance, and the procedure for exercising or forgoing this right of the franchisor;
- a requirement to disclose relevant details of any prospective purchasers that the franchisor requires to assess their suitability;
- training obligations from the outgoing franchisee to the purchaser;
- a requirement to pay outstanding debts to the franchisor;
- documents for the transfer to the purchaser;
- fee obligations, including fees relating to transfer, assignment and new franchisees;
- any fit-out requirements if there is a physical premise; and
- transfer requirements of any lease or licence.
Franchisees must put their request to transfer in writing. Additionally, the Code states the franchisor must not unreasonably deny this request. Without any formalised response within 42 days refusing the franchisee’s request, the franchisee may be entitled to infer acceptance of the request. However, given the complexity of Franchise Agreements and the possible risks, it is worth speaking to a solicitor with franchise experience before deciding to transfer the business without written consent.
In addition, if you operate the business from physical premises, you may transfer or assign the lease to the purchaser. Similarly, the lease agreement will determine what needs to be done to obtain the lessor’s consent and who pays the expenses.
Negotiating The Sale
In most cases, franchisors will provide details of their sale requirements in the franchise agreement terms. Before starting sale negotiations, you must ensure you have read and understand the terms in the agreement. For example, in some instances, you may be required to pay the franchisor’s legal fees for the sale or transfer. Further, you need to be aware of the applicable fees to ensure you adjust your sale price accordingly.
A more efficient sale will occur the earlier a franchisee can get a:
- confirmation for sale from the franchisor;
- transfer any leases or licences; and
- action any training requirements of the purchaser.
Lease or Occupancy Agreement
If there is a physical location and the franchise business is being operated under a lease agreement, during the transfer or sale, the lease itself will either need to be transferred to the purchaser, or a new lease negotiated.
To ensure the sale proceeds smoothly, franchisees should contact the landlord as early as possible to obtain consent and address any of the preconditions under the lease.
It’s also a good idea to speak with the purchaser to decide who will cover the leasing legal costs and who will obtain the landlord or mortgagee’s consent.
If it is the case that the franchisor is the lessee, you will likely have a licence or occupancy agreement in place. Further, the franchisor will need to grant the new franchisee an occupancy agreement or licence. Additionally, the landlord must provide consent. Similarly, we recommend that a franchise solicitor with leasing experience be consulted throughout this process.
Restraint of Trade
It is common for franchisees to have a restraint of trade clauses imposed in their franchise agreement which are enacted following the sale of the business. A restraint of trade clause is intended to stop the ex-franchisee from:
- engaging;
- operating; or
- being involved in any similar or competing business.
Sometimes these clauses extend to prevent employees, suppliers and customers from being poached. It’s reasonably common for purchasers to have their solicitor draft extra restrictions into the Sale of Business contracts to avoid any poaching or direct competition.
It is essential to understand the operation of restraints of the trade before proceeding with the sale. Indeed, doing so will help you establish what trade restraints are enforceable and whether these will conflict with your intended plans for future employment/income.
Ongoing Obligations After Expiry of Franchise Agreement
Certain obligations continue to operate upon the ex-franchisee after the franchise agreement ends. Moreover, ensure to stay compliant with ongoing obligations, particularly those relating to intellectual property.
There are many boxes to be ticked when closing out your responsibilities as a franchisee. Here are just some of the crucial things that you need to do:
- approach a franchise solicitor and an accountant for advice;
- consider taxation implications;
- negotiation of any contracts;
- attending to suppliers, employees and creditors of the business;
- making all necessary transfers, e.g. permits, business name, licences, and contracts; and
- making any fiscal adjustments (final stocktake or utilities).
Key Takeaways
If you are looking to sell your franchise business, you should ensure that you communicate all enquiries and prepare the relevant documents well in advance. Additionally, other components you will need to consider when selling your business, include:
- the franchise agreement;
- the sale negotiation;
- lease or occupancy agreements;
- restraint of trade clauses; and
- ongoing obligations.
If you need assistance with any of the above when selling your franchise business, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
In short, yes. Most franchise agreements will contain terms that require you to request the consent of your franchisor to sell the business.
In most cases, a franchisor cannot unreasonably withhold consent to transfer or sell the franchise. However, there may be circumstances where they have a first right of refusal to purchase the franchise back themselves.
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