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If you are a franchisee looking to sell your business and leave the franchise network, you may be uncertain whether you can go on to buy a competing business. Generally, your franchise agreement and business sale agreement will include a restraint clause that could prevent you from moving to a similar company. This means that you may be at risk of breaching your obligations if you do not fully understand these provisions. Importantly, if you are thinking about working for or buying another franchise business, you should consider:

  • timing;
  • location; and
  • the degree of similarity to the business you are selling.

This article explores the:

  • standard processes for selling a franchise business;
  • and ongoing obligations you will have to the franchisor.

Sale of Business Process

You will likely need to seek the consent of your franchisor before selling your franchise business. Following this process, the sale of your business will release you from the terms of the franchise agreement. However, a handful of continuing obligations may still be binding. Some of these constraints will impact your decision to buy a competing business, such as:

Your franchisor will likely ask you to sign a deed of surrender to restrict you from engaging in these activities. This is a legal document that outlines the terms on which you are released as a franchisee. These terms typically ensure that some of your obligations will continue to have full force after the sale is complete. 

For example, before selling the business, you will usually be required to: 

  • return the operations manual provided to you when you first bought the business;
  • return any confidential information you had access to while part of the franchise, such as passwords, client lists and email addresses; and
  • de-brand any equipment or assets excluded from the sale.

Therefore, you must understand your ongoing obligations to the franchisor when making plans to buy a competing business.

Use of Prior Knowledge Versus Use of Client Information

You should avoid using or disclosing any confidential information if you decide to join a competitor after selling your franchise business. 

For example, consumer research data can be a very valuable asset in the food hospitality industry. While disclosing the data from your past business could assist your new venture, it would likely breach your confidentiality obligations to your former franchisor.

However, you will not be in breach of your responsibilities if you simply utilise knowledge gained from years of operating the business. This is because the law does not consider this general business know-how to be the intellectual property of the franchisor. 

For instance, you may have developed a good understanding of customer service and food hygiene processes after years of owning a fast food franchise. Utilising these skills in your next role would not be considered a breach of your confidentiality obligations.

By contrast, it is likely unlawful to use the food hygiene instruction manual provided by your former franchisor becauase this is the franchisor’s intellectual property.

Additionally, the professional knowledge you have gained from accredited study qualifications in the finance or consulting industries cannot be considered the intellectual property of the franchisor. 

For example, an accountant exiting their franchise accounting business will be able to continue using the technical skills that they acquired through educational qualifications. 

However, you must not take advantage of any client lists you have acquired over the duration you operated the business. Businesses consider this information to be very valuable. Therefore, you may be in breach of the sale agreement if you take the list for personal use.

Business Sale Agreement

Once you have surrendered your franchise agreement with the franchisor, you should also consider your ongoing obligations to the purchaser of your franchise business. They will also want to ensure that you do not compete with the existing business by using operational knowledge or sharing confidential information. 

This means the buyer will typically request a standard restraint clause in the business sale agreement. The provision will likely impose a restraint on working for a similar business within a fixed-time and geographical region after the settlement of the sale.

For example, a cafe franchise might prohibit you from operating another cafe in the Sydney region for the next year.

Additionally, when two businesses are more closely related there is a greater likelihood you need to consider whether are in breach of the restraint of trade provisions.

For instance, if you have just sold your burger franchise, you may be permitted to operate a retail franchise but not another food hospitality business.

You must ensure that you can comply with this provision when you buy a competing business. Importantly, these agreements are generally treated more seriously by the courts than franchisor restraints. This is because: 

  • the buyer has fairly compensated you for the restraint clause by buying the business; and 
  • their business is likely to suffer damage if you do not comply with the restraint.

This restraint is separate from the franchisor restraint. Your lawyer should carefully draft the provision so that you can ensure compliance.

Key Takeaways

When selling your franchise business, you should be aware of any restraint clauses within the:

  • franchise agreement; or
  • business sale agreement.

These could potentially prohibit you from working with a competing business. You can avoid being in breach of these restraints by considering the: 

  • timing of your plans to enter a new venture;
  • location of your new business; and 
  • degree of similarity to the old business you are selling.

If you would like legal advice before selling your franchise business or buying a new competing business, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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