When Must a Franchisor Give Their Consent to Transfer a Franchise?

In Short

• Franchisors generally need to provide consent for the transfer of a franchise, as outlined in the franchise agreement.
• The franchise agreement should detail the conditions under which a transfer can occur and the criteria for consent.
• Franchisors must act reasonably and not withhold consent unnecessarily.

Tips for Businesses

When planning to transfer a franchise, review your franchise agreement to understand the conditions and criteria for obtaining the franchisor’s consent. Ensure all requirements are met to facilitate a smoother transfer process, and be prepared to demonstrate that the prospective transferee meets the franchisor’s standards.

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Table of Contents

• Obligations Under the Franchising Code of Conduct
• When is It Reasonable to Deny a Franchisee’s Request to Transfer?
• Considerations in Franchise Agreements
• Impact on the Franchise Network and Brand Reputation
• Transfer Fee Implications
• Key Takeaways
• Frequently Asked Questions

Franchise businesses can offer entrepreneurs a structured pathway to business ownership, leveraging established brands and operational models. However, when franchisees consider transferring their franchised business, navigating legal requirements, particularly concerning the consent of the franchisor, becomes paramount. A franchisor may impose restrictions on a franchisee’s ability to sell, transfer, assign or otherwise dispose of their franchised business. Any of these restrictions must be consistent with the rights and obligations of the parties under the Franchising Code of Conduct (Code) in relation to ‘transfers’.

Well-drafted franchise agreements should include comprehensive provisions regulating sales, transfers and assignments of franchised businesses. This article will explore the key legal considerations franchisees must address when transferring their business, focusing on the role of the Franchising Code of Conduct and best practices for drafting franchise agreements.

Obligations Under the Franchising Code of Conduct

The Code establishes clear obligations on franchisors regarding the transfer of franchise businesses. Essentially, franchisors cannot unreasonably withhold consent from franchisees seeking to transfer their business unless there are legitimate grounds for doing so. A transfer, as defined by the Code, encompasses scenarios such as the granting, selling, or any form of transfer of the franchised business.

When is It Reasonable to Deny a Franchisee’s Request to Transfer?

While the Code mandates reasonable consent, there are a number of circumstances where the franchisor may deny a franchisee’s request to transfer the franchised business, including:

1. if the franchisee has breached the terms of the franchise agreement, and this breach has not been remedied;
2. if the franchisee has outstanding debts owed to the franchisor and has not repaid, or made an attempt to repay the debt. These debts can be ongoing fees (royalties or marketing fund contributions), or be the transfer fee itself, or a combination of both;
3. the prospective transferee has not agreed to be bound by the terms of the franchise agreement, in particular the franchisee’s obligations. This notice is often required to be in writing; 
4. if transferring to the prospective transferee, the franchisor reasonably believes that the entire franchise network will be significantly adversely affected;
5. if the prospective transferee fails to satisfy the franchisor’s established selection criteria;
6. if the prospective transferee cannot satisfy a reasonable requirement under the franchise agreement to complete the transfer; or
7. the franchisor has reasonable concerns regarding the prospective transferee’s financial ability to meet their obligations under the franchise agreement.

Considerations in Franchise Agreements

Most franchise agreements specify that any change in control triggers transfer conditions. This includes not only the sale of the business but also changes in share ownership, ensuring franchisors maintain control over who operates under their brand. This consideration underscores the importance for both parties to maintain operational consistency and protect brand reputation. 

Impact on the Franchise Network and Brand Reputation

A critical consideration for both franchisors and franchisees during a transfer is the potential impact on the franchise network and brand reputation. Franchisors have a vested interest in maintaining consistency and quality across their franchise locations to uphold brand value and customer trust. Therefore, assessing whether the prospective transferee meets the network’s operational standards and financial capabilities is essential.

Additionally, franchisees seeking to transfer their business must ensure clear communication with the franchisor regarding operational requirements and selection criteria. This transparency fosters trust and cooperation, facilitating a smoother approval process and safeguarding the overall strength and market presence of the franchise system.

Transfer Fee Implications

Franchise agreements typically stipulate a transfer fee payable by the outgoing franchisee. This fee may represent a percentage of the sale price or a set dollar amount. The franchisor charges this fee to cover the administrative costs they incur during the transfer process. If you are a franchisee planning to transfer your business, you should carefully review your agreements and understand the financial implications. 

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Key Takeaways

Navigating franchisor consent in franchise transfers requires proactive engagement and adherence to legal requirements. By maintaining transparency and addressing potential challenges upfront, both franchisors and franchisees can facilitate successful transfers that uphold the integrity and profitability of the franchise system.

If you are a franchisee planning to transfer your business or a franchisor evaluating a transfer request, 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.

Frequently Asked Questions