In Short
- Your franchise agreement outlines your rights and obligations when your franchisor sells the franchise. Review it carefully and seek legal advice if needed.
- The Franchising Code of Conduct does not require franchisors to obtain franchisee consent but does mandate disclosure of key changes.
- If you no longer wish to continue as a franchisee, you can request early termination or sell your business, subject to franchisor approval.
Tips for Businesses
If your franchisor is selling the franchise, take proactive steps to protect your business. Review your franchise agreement, understand your obligations, and check if you need to sign any documents. If you want to exit, consider negotiating a termination or selling your business. Seek legal advice before making any decisions.
In the first part of this series, we explored the potential impact on franchisees when a new franchisor takes over the franchise network. As a franchisee, it may feel like you have limited options when your franchisor decides to sell. However, understanding your rights and responsibilities in this situation is essential. This article will outline your obligations and explain how to protect your business best when your franchisor sells the franchise.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Review Your Franchise Agreement
When your franchisor decides to sell the franchise, your first point of reference should be your existing franchise agreement. This document outlines your rights and obligations in such a situation. In most cases, franchise agreements do not require franchisors to obtain express consent from their franchisees before selling to a new franchisor. However, it is still important to carefully review your agreement.
You may also have obligations under the franchise agreement to assist with the sale. This could include signing a deed of assignment or a deed of variation, transferring your existing franchise agreement to the incoming franchisor. Additionally, the franchisor may ask you to sign a deed of release, waiving any claims you may have against them under the agreement. Before signing any of these documents, seeking advice from a franchise lawyer is crucial.
Sometimes, you may not be required to take any action to facilitate the sale. The franchisor may simply:
- notify you of the change in ownership;
- transfer their interest to the purchaser; and
- assign their rights and responsibilities under the franchise agreement to the new franchisor.
Since franchise agreements are generally drafted in favour of the franchisor, you are unlikely to have significant rights regarding the sale. However, from a commercial standpoint, a potential purchaser will typically want franchisees to support the transition. In some cases, the sale may even be conditional on securing the approval of most of the franchise network.
Franchisor Obligations Under the Code
The Franchising Code of Conduct does not impose specific obligations on franchisors when selling their franchise. Instead, the transfer process is governed by the terms of the franchise agreement, meaning the process can vary between franchise systems.
However, franchisors must disclose certain changes that are materially relevant to franchisees or potential franchisees, including:
- a change in the ownership or control of the franchisor (clause 17(3)(a)(i) of the Code); and
- a change in the ownership or control of any relevant intellectual property used in the franchise network (clause 17(3)(h)).
If either of these changes occurs, the franchisor is required under clause 17(2) of the Code to provide reasonable notice to current and potential franchisees—typically 14 days or less. If you have not received this notice, you should contact your franchise solicitor immediately.
Additionally, if the franchisor enters administration (voluntarily or otherwise), they must notify franchisees and provide the name and contact details of the appointed administrator (clause 17(g)). If your franchisor has gone into administration, seek legal advice as soon as possible to understand your options.
Continue reading this article below the formRules Around Obtaining Franchisee Consent
While most franchise agreements do not require franchisors to obtain express consent from all franchisees in the network, a prospective buyer may still prefer to start the franchise relationship with franchisees open to the change.
Some transactions are even structured so that the franchisor must obtain approval from a specified percentage of franchisees before proceeding with the change in ownership.
Signatures and Approval
A common clause in franchise agreements requires franchisees to sign a Deed of Assignment or another document confirming they will not make further claims against the franchisor.
In most cases, franchisees are not consulted before these decisions are made. Instead, the franchisor typically:
- notifies franchisees of the change in ownership or interest
- transfers their interest to the purchaser; and
- assigns their rights and duties under the agreement to the new franchisor.
It is also common for the agreement to release the outgoing franchisor from any ongoing obligations or liabilities once the transfer or novation is complete. In some cases, the franchisor must obtain a Deed from the purchaser, confirming that they will comply with the terms of the agreement after the sale.
Franchisees do not always need to provide consent or sign off on the transfer. However, agreements that facilitate the transition to a new franchisor are generally drafted in a way that is favourable to the franchisees. If you believe your rights as a franchisee have not been considered, it is essential to seek advice from a franchise solicitor.
Rules Surrounding Provision of Disclosure Document
As a franchisee, you might expect to receive a disclosure document from the purchaser before the sale is finalised. However, this is not expressly required under the Franchising Code of Conduct. Whether a disclosure document is provided depends on the type of agreement between the current franchisor and the potential purchaser.
For example, disclosure may not be required in a Share Sale Agreement where the franchise agreement remains with the franchisor. However, if the franchise agreement is transferred to the purchaser, the new franchisor (assignee) is generally expected to:
- prepare a disclosure document;
- distribute the document to the franchisee network, along with:
- a copy of the Franchising Code of Conduct; and
- a copy of the franchise agreement that each franchisee signed before the purchaser took over.
Whether this process is mandatory or just common practice, the Code does require both the current and new franchisor to provide an up-to-date disclosure document upon request. If a franchisee requests this document in writing, the franchisor must provide it within 14 days.
What Are Your Options?
If you decide that you no longer wish to continue as a franchisee after learning that your franchisor is selling the franchise, you have a few options to consider:
1. Request an Early Termination
Under the Franchising Code of Conduct, you can request to terminate your franchise agreement at any time. To do this, you must submit a written proposal to your franchisor outlining your reasons for termination.
The franchisor is required to respond in writing within 28 days, providing a substantive reply. If they refuse your request, they must clearly explain their reasons. The franchisor may also consult with the potential purchaser before making a decision, as the new franchisor is unlikely to want a disengaged or unhappy franchisee in the network.
2. Sell Your Franchise Business
Alternatively, you may choose to sell your franchised business to a new franchisee. Before proceeding, review the terms of your franchise agreement to ensure you meet all obligations related to selling your business.
Most franchise agreements require you to:
- obtain the franchisor’s consent before selling; and
- ensure the franchisor approves the incoming franchisee.
If your franchisor unreasonably withholds consent, they may be in breach of their obligation to act in good faith. If you believe this is the case, seeking advice from a franchise solicitor is recommended.
Key Takeaways
As a franchisee—or someone considering entering into a franchise agreement—it’s important to remember that franchisors may transfer their interest to new purchasers. If you learn that your franchisor is planning to sell, always review the terms of your franchise agreement to understand your rights and responsibilities.
If you decide you no longer want to continue as a franchisee, you may consider the following options:
- negotiate an early termination of your franchise agreement; and
- sell your franchised business to a new franchisee.
Understanding your options early can help you make an informed decision and protect your interests.
If your franchisor is selling the franchise and you require assistance, our experienced franchise lawyers can help as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
First, review your franchise agreement to understand your rights and obligations. It will outline whether you need to take any action, such as signing a deed of assignment or deed of release. If unsure, seek legal advice from a franchise solicitor.
In most cases, no. Franchise agreements typically do not require franchisors to obtain franchisees’ express consent before selling. However, some agreements may require the franchisor to secure approval from a majority of the franchisee network.
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