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Selling a business in NSW involves a lot of paperwork, especially if that business happens to be a franchise! It’s very important to ensure the contract is formally documented in a Sale of Business Agreement, and the appropriate searches and due diligence is undertaken prior to contracts being engaged.
Legal considerations when selling a business
If you’re a franchisor and are thinking of selling your franchise business, here is a quick list of the issues that could arise, and which you should keep in mind in pre-contractual negotiations with prospective purchasers:
- Franchisors consent – most franchise agreements set out that a franchise business cannot be sold or transferred without the express consent of the franchisor, which franchisor’s consent will not be unreasonably withheld. In order to be able to sell your business, it is reasonable for the franchisor to require you to rectify any breaches and provide details of the proposed purchaser so appropriate due diligence may be undertaken, so telling your franchisor of your intention to sell should be one of the first things you do (they may have a prospective purchaser, too)
- Lessors consent – if you are leasing premises directly, the lease likely prescribes that the lease cannot be assigned or transferred without the lessors consent. Such consent is, usually, incorporated into a deed of assignment. Alternatively, the lessor may prefer for your lease to be terminated or a new one entered into. As you cannot finalise any sale without this issue first being sorted, opening up the line of communication with your lessor or their representative early in negotiations will help prevent any delays down the track.
- Intellectual Property issues – usually, the intellectual property of a franchisor is licensed to a franchisee by way of the franchise agreement, i.e. they’re entitled to use it, but don’t own it. Some franchisees, however, develop their own intellectual property by way of unique systems or business practices. It’s important you understand where you stand in relation to intellectual property issues before you present the business to prospective purchasers.
- Form of Agreement – NSW, like most states, has a prescribed from of sale of business agreements. But simply ticking the right boxes is not enough, you will likely need special conditions drafted, and appropriate attachments collated.
Conclusion
Prior to finalising the sales terms, it’s prudent to talk to a franchise lawyer who knows about selling and buying franchise businesses, so they can make sure all the T’s are crossed and I’s dotted prior to exchange.
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