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As a franchisor, you may be considering selling your business. However, this can be a difficult and complex process, as you have agreements with multiple franchisees. As a result, it is essential that you are aware of the options available to you. This article will outline different ways you can sell a franchise business and how to ensure an effective transition of ownership.
Selling Options
The sale of a successful franchise network should be done carefully and with plenty of consideration of the implications this may have on your franchisees. As franchisees have entered into their franchise agreements with you, a change at the franchisor level can cause significant disruption to a franchise network and raise questions about the future of the franchise.
While most franchise agreements include a clause allowing you to sell your franchise network without the consent of the franchisees, you should always seek to avoid confusion and disruption. As such, it is important to consider the structure of the transaction and how much of the franchise business you want to part with. The table outlines some possible transaction structures.
| Option to Sell | Explanation |
|---|---|
| Sale of Business | You sell the entire franchise network through a Sale of Business Agreement |
| Master Franchising and Assignment | You sell the rights to operate the franchise system in a specific geographic area by assigning the franchise agreements under a master franchise to a third party. |
| Sale of Shares | You can sell the entire business, including the brand and any intellectual property, or transfer your shares to the buyer, so they become the majority shareholder in the company(ies) you operate the franchise network through. |
| Sell to a Third Party | You may consider merging with a third party or even a competing franchise and potentially rebranding the network. |
Below, we unpack the options for selling a franchise business and detail some of their advantages and disadvantages.
1. Sale of Business
A well-drafted sale of business agreement outlining your network can streamline the process of selling a franchise. Importantly, it should factor in brand strength and financial performance.
The agreement will include all assets, rights and obligations in transferring ownership to a new franchisor. Generally, the sale contract will also include pre-conditions to the transfer taking effect or changes that must occur within a period of time after the transfer. Key considerations you should note include:
- specifying how the franchise agreements with franchisees will be handled;
- determining if and how leases will be transferred to the new owner;
- terminating or assigning any essential contracts to the business, such as supply agreements or software licences;
- determining how any relevant intellectual property will be assigned to the new owner;
- including template communications with the franchise network;
- undertaking training with the new owner; and
- determining when the new owner should participate in meetings with franchisees and how to launch the change in ownership.
A standard form contract is likely not appropriate when entering a sale or business agreement. You should work with a lawyer to create a specialised sale contract that addresses the above considerations and determines a timeline for delivery. This is because these items often require time and input from third parties.
When determining an appropriate purchaser, a key priority should be ensuring that any potential buyer can maintain the brand’s standards. They should also be able to support your former franchisees effectively.
Furthermore, you may wish to include clauses that protect the franchisees’ interests and the integrity of the franchise network. These could include warranties that the new owner will provide the same level of support to franchisees or keep current training programs and operational assistance.
2. Assignment of Rights Under a Master Franchise
If you are looking to part with your interests in a franchise network slowly, you may also consider selling off areas of the business without selling it entirely immediately.
Geographically dividing the business occurs when you sell off the franchise rights in one state, such as Western Australia. However, you will operate the franchise in other states, such as Victoria or Queensland.
Alternatively, you may only sell one business you operate under your franchise. For example, you may operate pest control, cleaning and mowing businesses as a franchise network under the same brand. You might assign someone else the right to be the franchisor of the pest control business whilst you continue to be the franchisor for the cleaning and mowing business. This purchaser can take over the other two businesses once they prove themselves capable of operating the pest control business and properly supporting the franchisees in this network.
Where a master franchise agreement is granted, you effectively assign your rights as a franchisor to the new master franchisee. This means that they effectively take over your role and report to you. At the same time, you continue to earn an income through the master franchise’s operation.
A well-drafted franchise agreement should give you the right to assign or novate your rights under the franchise agreements to the incoming master franchisee. The table below outlines the difference between these two terms,
| Term | Definition |
|---|---|
| Assignment | The original franchise agreement remains operational, allowing you to transfer your rights and benefits to the new owner. |
| Novation | A Deed of Novation allows the existing franchise agreement to be replaced by a new agreement. This releases you from your liabilities under the original franchise agreement. |
3. Selling Your Shares
An alternative to selling your franchise network is to part with some or all of the shares issued in your company through which you operate the franchise network.
While most franchise agreements do not prevent the franchisor from selling shares in their business, you should ensure this is the case for your franchise. Many franchise networks have complex corporate structures, so you may also need to consider which entities you want to sell the shares in. Similarly, you may need to think about whether this will involve a complete share sale or only part of the shares. If you have multiple shareholders and directors, then the terms of your shareholder agreement may also dictate how any shares can be sold and who they can be sold to.
When shares in the business are sold, and the directors or associates change, you are obligated to prepare a new disclosure document with updated details. The new franchisor must also notify the network of the change in the franchisor’s majority ownership or control within 14 days.
An up-to-date disclosure document clarifies and transparently informs both existing and potential franchisees. This helps them understand the implications of the new ownership structure for their business relationship. It also ensures that the new franchisor is complying with the Franchising Code of Conduct. Thorough communication and transparency throughout the transition process can help maintain trust and stability within the franchise network.
4. Selling to a Third Party
Another option for selling the franchise network is to consider merging with a third party with experience in the same industry or in operating a franchise network.
In today’s corporate landscape, it is common for companies to manage multiple brands under one business. For example, Starwood Hotels & Resorts oversees multiple hotels such as Four Points by Sheraton, Le Méridien, and St. Regis Hotels & Resorts.
Navigating a merger with a third party can be a complex and lengthy process. As a result, you should demonstrate to franchisees:
- any benefits from a merger, such as expanded resources and support; and
- a clear communication plan to help them stay informed.
If you choose this method to sell your franchise, you should review your franchise agreements and consult a franchise lawyer. This is essential to navigate the intricacies of rebranding, documentation and regulatory compliance. In doing so, you can ensure a smooth transition to the new business structure. By carefully considering the many moving parts involved, you can make informed decisions that maximise the benefits while minimising disruptions to your franchise network.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Key Takeaways
If you are considering selling your franchise business, it can be exciting and daunting. It is imperative that you understand the sale process and the many pathways available to transferring your ownership, which include:
- selling your entire business via an agreement;
- assigning your rights under a master franchise;
- selling your shares; and
- selling to or merging with a third party.
If you have further questions about selling your franchise, 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.
Continue reading this article below the formFrequently Asked Questions
When transferring ownership, you should ensure that the new franchisor can maintain your brand’s standards and continue supporting your franchisees. Any sale of your franchise should also be compliant with regulations such as the Franchising Code of Conduct.
You may choose to sell your franchise directly via a sale of business agreement. Alternatively, a gradual transfer of ownership can occur through assigning your rights, selling your shares or selling your business to a third party.
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