There are multiple reasons why you may consider selling your franchise business. For instance, you might be:
- retiring;
- wanting to try your hand at something new; or
- wishing to spend more time with their families.
In any case, selling your franchised business can be a complex process. Additionally, it is important to be aware of the requirements for selling within your franchise agreement, or you may face legal consequences. This article sets out the steps you need to take to sell a franchise business to a new buyer.
Your Obligations as the Seller
Before you can sell your franchise, you must first read through your franchise agreement. This is always a good place to start to understand your obligations and the process you need to follow.
Furthermore, you will usually find the provisions regarding the assignment of a franchise business within your franchise agreement. For example, some franchise agreements will require you to get the franchisor’s prior consent before you list the business on the market. Some other general conditions could include:
- the new franchise business buyer has to meet the franchisor’s selection criteria;
- interview by the franchisor of the prospective purchaser;
- provision of a first option to purchase in the franchisor’s favour; and
- payment of all outstanding accounts and fees to the franchisor and suppliers.
However, it would help if you keep in mind that the franchisor can still refuse to consent to a proposed transfer in most cases. If this happens, the franchisee can demand a written answer from the franchisor and challenge the franchisor’s refusal. If the franchisor fails to respond within 42 days, the Franchising Code of Conduct states that you can then sell the business without the franchisor’s consent.
First Offer to the Franchisor
Your franchise agreement will likely require you to offer your franchise business to the franchisor for the opportunity to purchase before anyone else. You may find this under the term ‘First Right of Refusal.’ The franchisor will then consider the terms of your agreement. Additionally, your franchisor usually has about three weeks to accept or reject your offer. If the franchisor accepts your offer, you both will enter into a formal purchase contract. If they reject your offer, they may make a counteroffer. In this case, you can consider their proposal and choose to accept or reject their counteroffer. If you accept, you will enter into the formal purchase contract as above. In some instances, you can find another buyer. Such a case might include:
- if you reject the franchisors counteroffer;
- the franchisor does not respond to your original offer; or
- the franchisor rejects your offer outright.
Offer to an Alternative Buyer
The next step will be to gain the franchisor’s approval when you find another buyer. They usually have a certain period to do so. If they don’t respond, it means the buyer receives automatic approval.
Before the franchisor decides on the buyer, there are many steps complete. As a franchisee, you should familiarise yourself with any preconditions set out in the franchise agreement regarding:
- sale;
- transfer; or
- assignment.
Assessing the buyer is quite an extensive process, so there will usually be a few requirements to meet. For example, the buyer will often need to:
- put down a deposit on the purchase;
- complete training for the franchise;
- pay certain fees;
- acquire the appropriate licence to operate the franchise; and
- possibly take over your lease (with your landlord’s approval).
At this point, the franchisor will be able to assess if the buyer can meet all of the requirements. Generally, franchisors cannot unreasonably withhold their approval of a proposed transferee (purchaser). So, if the buyer can meet the requirements, the franchisor will likely approve. Then, you can set a date for the sale of the franchise.
Transferring the Franchise
Upon setting the date of the sale, you will need to make sure you pay any outstanding payments and securities owing to the franchisor. When you sell a franchise to a new buyer, you are effectively transferring the franchise to them.
Generally, there are two ways the sale will occur. One way includes a:
- A sale of business agreement between the outgoing and incoming franchisee;
- a deed of surrender as between the outgoing franchisee and franchisor; and
- a new franchise agreement between the franchisor and the incoming franchisee.
These three documents are the most common method of effecting a sale of a franchised business. Furthermore, both parties generally enter into these agreements concurrently to ensure the continued operation of the business.
Another way the sale could occur is through a deed of assignment of the franchise agreement between all three parties and a separate sale agreement between the outgoing and incoming franchisee. Here, the same franchise agreement will operate post-sale. Essentially, the outgoing franchisee will transfer it to the incoming franchisee and both parties will likely enter into these documents concurrently.
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Key Takeaways
There are several legal issues to consider when selling a franchised business and legal documents to prepare. You also need to follow multiple processes when selling your franchise business. Given the complexities, it is advisable to obtain specialist advice.
If you need some guidance in selling your franchised business, our experienced franchise lawyers can guide you through this. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 447 119 or visit our membership page.
Frequently Asked Questions
Most franchise agreements include a clause where a franchise seller must first make an offer to the franchisor at an agreed price before selling it to an alternative buyer.
This will depend on what your franchise agreement says. However, remember that franchisors have 42 days to respond to your request.
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