The sale of most businesses will typically require the assistance of a lawyer and franchise businesses are no different. In fact, they might actually require more assistance than other businesses. In our franchise lawyer special today, we answer the question: How do I sell my franchise?
The Franchise Agreement
It is fairly commonplace for the franchise agreement to prohibit the sale of the business without the consent of the franchisor. Normally, a franchise solicitor will draft complex transfer, sale and assignment provisions into the agreement that contain various preconditions to the franchisor’s consent.
The procedure and conditions of these clauses may include:
- Time and format prerequisites of consent requests;
- Any ‘first right of refusal’ clause and the procedure for exercising or forgoing this right of the franchisor;
- Any requirement to disclose relevant details of any prospective purchasers that the franchisor requires to assess the how suitable they are as potential franchisees;
- Any training obligations from outgoing franchisee to incoming purchaser;
- Any requirement to pay unsettled debts to the franchisor;
- Any documents needed to affect the transfer to a purchaser;
- Any fee obligations, including fees relating to transfer, assignment and new franchisees;
- Any fit-out requirements;
- Any transfer requirements of any lease or licence.
It’s worth noting that the Operations Manual usually provides a more detailed explanation of how to conduct a transfer of a franchise, and is worth discussing with your franchise solicitor.
Franchisees must put their request to transfer in writing and, according to the Code, the franchisor must not unreasonably deny this request. Without any formalised response within 42 days refusing the franchisee’s request, the franchisee is entitled to infer acceptance of the request.
In addition, you may wish to transfer or assign the lease to the purchaser. Similar to the Franchise, the lease agreement will set out what needs to be done to obtain the lessors consent and who pays expenses (clue: it’s not the lessor).
Negotiating The Sale
Have you become familiar with the franchisor’s sale requirements detailed in the franchise agreement terms? No? You’d be wise to speak with a franchise solicitor about how the sale price of the franchise business might be affected by these terms. For example, is there a requirement you pay the franchisors legal fees or some set amount? Make sure you’re aware of any fees so that you can adjust your sale price.
The earlier a franchisee can get confirmation for the sale from the franchisor, transfer any leases or licences, and action any training requirements of the purchaser, the more efficient the sale will be.
If the franchised outlet is being operated under a lease agreement, during the transfer/sale, the lease itself will either need to be transferred to the purchaser or a new lease negotiated. A franchise solicitor can assist with the negotiations.
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 incoming franchisee (purchaser) to decide who will cover the leasing legal costs and who will obtain the landlord/mortgagee’s consent.
It might be the case that the franchisor is the lessee. An occupancy licence would need to be granted to the new franchisee by the franchisor and consent given by the landlord. Again, it’s advisable that a franchise solicitor with leasing experience be consulted.
Restraint Of Trade
It is common for franchisees to have ‘restraint of trade’ clauses imposed following the sale of the business. A restraint clause is intended to stop the ex-franchisee from engaging, operating, or being involved in any similar/competing business. Sometimes these clauses extend to prevent employees, suppliers and customers from being poached. It’s reasonably common for incoming franchisees to have their franchise solicitor draft extra restrictions into the Sale of Business contract.
Speak with a franchise solicitor before proceeding to sell the franchise business to establish what restraints of trade are enforceable and whether these will conflict with your intended plans for future employment/income.
Ongoing Obligations After Expiry of Franchise Agreement
There are certain obligations that continue to operate upon the ex-franchisee after the franchise agreement has ended. Make sure 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 franchisee. Here are some of the important things that need to done:
- Approach a franchise solicitor and an accountant for advice;
- Consider taxation implications;
- Negotiation of any contracts;
- Attending to suppliers, employees and, of course, creditors of the business;
- Making all necessary transfers e.g. permits, business name, licences, contracts;
- Making any fiscal adjustments (final stocktake/utilities, etc.)
Communicate all enquiries and prepare documents well in advance. This is the secret to a problem-free sale of the franchise business. For assistance, consider contacting a franchise solicitor here at LegalVision on 1300 544 755.