If you are a franchisee who is considering selling your franchise, the options available to you might be confusing. Just like any negotiations for buying and selling a business, you need to consider all commercial factors and your legal rights properly. Importantly, one of the first steps you will need to take is sending a notification to the franchisor of your intent to sell. Additionally, there may be: 

  • certain steps that you will need to follow; and 
  • fees that you may need to pay.

Therefore, it is vital that you understand the entire process before you get started. This article explains the various ways you could sell your franchise, specifically focusing on your requirement to give a notification to the franchisor.

Selling Your Franchise as a ‘Going Concern’ Business

If you plan to sell your franchise business but not the shares in the company that owns the current operation, then you will be selling the business as a ‘going concern’. Essentially, this means that you are selling everything that is required for the new owner to continue operating the business, including:

  • information;
  • documents;
  • equipment;
  • access keys;
  • stock;
  • employees; and
  • anything else that the purchaser will need to carry on the business.

This type of sale is generally GST exempt, meaning that you do not charge GST in addition to the purchase price.

When selling an existing franchise, you may have an obligation to seek the consent of the franchisor and your landlord. Therefore, you should understand when you are required to notify them. 

In addition, you will likely need to operate the franchise right until the point of sale. Stopping early may be a breach of your franchise agreement, which could impact your ability to sell the business. 

Finally, you should receive a full release from both the franchisor and your landlord to document that you are no longer responsible for your obligations under the franchise agreement and lease.

Transfer of Ownership

Another way to transfer control of your franchise business is to simply sell your shares, either: 

  • in whole; or 
  • in part, where you transfer a controlling interest to the buyer.

In this case, the company operating the franchise business remains the same but the shareholders change.

This method of selling your franchise is not as common as the sale of your business as a going concern, as it renders the buyer responsible for any old debts or claims against the company once the shares are purchased. Therefore, the buyer will need to be very confident that they understand the history of the company before they are comfortable with a transfer of ownership.

Instead of a business sale agreement, this method requires a share sale agreement to: 

  • document the transfer of shares; and 
  • confirm the seller of the shares has disclosed all relevant information concerning the company prior to the transfer.

Sometimes, franchisees may not realise that they are required to notify and seek the permission of their franchisor when they transfer a controlling interest in the shares of the franchisee company. It is important to treat this as a “sale” similar to the sale of the franchise business itself. This means that you need to review your assignment and transfer obligations under the franchise agreement and lease, to ensure you comply with the conditions associated with this sale. If you need to give a notification to the franchisor, make sure to comply with these obligations.

Handing Back the Franchise or Transferring Ownership to the Franchisor

If it is difficult to find a suitable buyer for your franchise, you have the option to:

  • continue operating the franchise until the end of the term of the franchise or lease; or
  • offer the business to the franchisor.

If you want to transfer the business to the franchisor, your franchise agreement may include specific provisions dealing with the valuation of the business. Generally, the value is based only on the value of the physical assets you own after accounting for accounting for depreciation or amortisation. This will often be much less than what you could have received by selling the business as a ‘going concern’ to a third party.

Once your franchise agreement ends, the franchisor would then enter into a completely new agreement with a new incoming franchisee. This is called a grant of a franchise. A franchisor may also decide to operate the franchise themselves whilst they look for a replacement. 

In difficult circumstances, you may: 

  • ask the franchisor to operate the business until you can find an owner; and 
  • negotiate the transfer of the net funds to you once a buyer has been found, less the franchisor’s operating costs whilst running the business after you exited. 

This will allow you to make a fresh start and move on, whilst the franchisor looks for a buyer. The costs involved in this option are considerable and should only be contemplated as a last resort.

Prerequisites for Selling Your Franchise

Your franchise agreement will set out any rights and restrictions on selling, transferring and assigning your franchised business.

The franchise agreement will outline:

  • the information you need to provide prior to any sale;
  • any approvals that you (or the purchaser) need to obtain from the franchisor; 
  • whether you have to pay any transfer or assignment fees; and
  • other conditions that you may need to meet before a sale is allowed.

You should take these considerations into account when pricing the business for sale.

For example, you can note the value of any assignment fee that you are required to pay and pass this cost onto the new buyer.

Conditions and Fees in a Sale

Before you can sell your franchise onto a new franchisee, your franchisor may require you to resolve any outstanding items or issues.

For example, they may require you to:

  • correct any breaches; 
  • resolve any defaults; 
  • settle any outstanding fees; or
  • demonstrate that you have met certain performance criteria.

Additionally, it is common for franchise agreements to set a fee for an assignment or transfer of your business. This is primarily to cover the franchisor’s costs in facilitating the process. 

Your franchisor can set any method to calculate the assignment or transfer fee. However, it is common to see the fee:

  • fixed at a minimum value;
  • specified as a proportion of the sale price or initial franchise/licence fee; or
  • a combination of all of the above.

You may come to an agreement with your franchisor to waive all or part of the assignment/transfer fee. Any agreement should be in writing as part of the formal legal documents signed by you and the franchisor when facilitating the sale.

Importantly, you should seek to negotiate a reasonable assignment fee before you even enter into the franchise. It is often easy to neglect this aspect of your agreement, given that selling the business can seem like a long way off. However, you should try to bargain down the assignment fee if you consider it unreasonable before signing any franchise agreement. 

Timeline for Sale

The time between first realising that you want to sell your franchise and completing the sale can be quite lengthy. This means that it is important to start the process early.

Some factors you will need to consider when determining your timeline include:

  • the time it takes to advertise your franchise and find a purchaser;
  • the time between taking a deposit on the business (if any) and paying the full amount;
  • any due diligence that the purchaser wants to conduct on the franchise;
  • any requirement to provide a notification to the franchisor before a sale;
  • how long it would take the franchisor to approve the buyer as a new franchisee;
  • any commercial negotiations regarding price, equipment, stock (etc.) that need to take place;
  • how long it would take you to prepare the necessary information and paperwork;
  • any further steps that the franchisor may require, such as ensuring that all your business records and information are up-to-date;
  • whether the purchaser needs to obtain finance to buy the franchise from you; and
  • any unpredictable delays or obstacles to the process.

Franchisor Approval and Right of First Refusal

Most franchise agreements will require you to obtain franchisor approval of the buyer before you can sell your franchise to them. However, some franchise agreements also contain a right of first refusal. This creates an extra step in the process of selling your franchise.

A right of first refusal means that when you receive an offer from someone to purchase your franchise, you are obligated to:

  • provide a notification to the franchisor; and
  • give them an opportunity to purchase the franchise on the same terms offered.

They will often have a limited window of time to accept or reject this offer. You will only be free to continue negotiations with the potential purchaser if your franchisor is not interested in purchasing your business on those terms.

Depending on the terms of your franchise agreement, the franchisor may be entitled to see and accept or reject any further offers made to you throughout the negotiation process. This is particularly so if they are lower than previous offers.

Selling your franchise back to the franchisor may be an effective way to: 

  • square off any debts that are owing; 
  • avoid assignment/transfer fees; and 
  • minimise or eliminate the costs of engaging an agent/broker. 

However, you should always compare the market value of your franchise against the franchisor’s offer as part of any commercial negotiations.

Key Takeaways

If you want to sell your franchise business, you must consider your obligations under your franchise agreement. Particularly, you will likely need to provide a notification to the franchisor. This will be the case whether you:

  • sell your franchise as a ‘going concern’ business; or
  • transfer ownership by selling the controlling interest of your shares.

Under any arrangement, you will also need to fulfil any prerequisites, conditions and fees for the sale of your franchise. If you would like assistance navigating the sale of your franchise or providing a notification to the franchisor, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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