Reading time: 6 minutes

A franchise buy back occurs when you, as the franchisee, are looking to leave the system but cannot find a purchaser. The franchisor always has the option (under the franchise agreement) to buy back the assets of the business. A franchise buy back will usually occur in two situations:

  1. the agreement has come to an end; or
  2. there has been a breach and the franchisor wants to terminate the franchise agreement and buy back the equipment.

The article will explain how to prevent or make the most of a buy back if it occurs.

What’s a Breach and Termination?

A breach occurs when a franchisee fails to do something specified in the franchise agreement. If you have breached a term of the franchise agreement, the franchisor must issue you with a formal breach notice if they intend to end the agreement. This should not be taken lightly, as a failure to remedy the breach can result in the termination of your agreement.

The notice must set out the:

  • breach;
  • franchisor’s intention to terminate the agreement;
  • steps to remedy the breach; and
  • time you have to fix the breach.

The franchisor is required to give you a reasonable amount of time to remedy the breach. However, this is not a defined term. The Franchising Code of Conduct states that a reasonable amount of time is usually a month or less. After the expiry of this time, they can issue you with a termination notice.

Selling Your Franchise

Under the Code, the franchisor cannot unreasonably stop you from selling your franchise. However, selling your franchise may become increasingly difficult if the franchise continues to lose money. If your franchise is starting to fail, you should consider selling it early. This will be more attractive to purchasers compared to a business that has been failing for a long time.

If you have been issued a breach notice and you intend to sell it, you should do everything in your power to remedy the breach and prepare for sale. Otherwise, the alternative may be the termination of your franchise. If the franchisor terminates your agreement, you will lose your right to sell the franchise. In this period, the offer you receive may be very low.

However, you should consider all offers as you will likely get less in a buy back.

If Your Franchise Agreement Has Been Terminated

Lease or Licence

In terms of your lease, you will either:

  • hold the lease; or
  • the franchisor will hold the lease and you will have a sublease or licence.

If the franchisor holds the lease, they have a lot more power as it allows them to remove you from the premises once the agreement has come to an end. They will be more likely to initiate a buy back if they hold the lease as they can simply terminate you and potentially continue to operate the business. However, they will have to compensate you for the equipment.

If you have a lease directly with the landlord, the lease may require you to assign it to the landlord if they request this. However, if the landlord declines to assign it, you may be able to retain the store. This may give you the option to debrand and begin operating the same or a different business.

However, you should consider the restraint of trade provision in the franchise agreement. The franchisor may be able to enforce the restraint of trade in court which would prevent you from running the business. It is also important to state that the lease may set out that the location has to be returned to the original state. This means you would have to remove the fitout, which can be costly.

Equipment

One of the main assets of your business during a buy back is the equipment. The franchisor may want to buy back the equipment for a number of reasons.

Firstly, the franchisor may want the equipment to start the franchise in that location or a separate location.

Secondly, the franchisor may wish to stop you or a competitor from opening up a competing business.

Most franchise agreements set out that franchisors have first right of refusal. This means franchisors have the right to purchase the assets or prevent the franchisee selling them to another person.

If you do not have any other offers, the franchisor will only have to purchase the equipment from you for the written down value. An easy way to calculate this value is to take the price you paid for the equipment, minus the depreciation. Almost all businesses will write off the value of the equipment for tax purposes.

For example, if you purchased the equipment four years ago for $100,000 and claim that it has depreciated $20,000 every year, they will only need to pay you $20,000.


You should read these provisions carefully. If you are unhappy with the valuation, you should appeal in accordance with the provisions in your franchise agreement. This may include an appeal to an independent valuer.

Stock

Another aspect of a buy back is the stock that you have on hand in the event of a termination. If a franchisor terminates the agreement they will not need to purchase back this stock. Therefore, it is important to try and sell all of the stock before your agreement is terminated. Once terminated, restraints of trade may also prohibit you selling the stock.

Key Takeaways

Overall, if your franchise is not doing well, it may be time to consider selling the business. It is important to consider this option early as the longer the business fails, the less attractive it will be to potential purchasers.

If you have been issued with a breach notice, this should be taken seriously as failure to remedy the breach can give rise to termination and the loss of ability to sell the business. The equipment will form the bulk of the buy back and it is important to understand that the franchisor will only have to pay you the written down value of the equipment.

If you would like to learn more about buy backs, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form below.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Matthew DeRusha
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards