- Selling a franchise is different from selling an ordinary business. A franchisor will have an established process of selling an individual franchise business within the franchise network.
- The procedure to sell a franchise will be called an “assignment”. You should discuss any potential sale of your franchisee with the franchisor.
- As a franchise seller, you are required to provide a disclosure document to the potential buyer of your franchise.
Obligations in Selling a Franchise as a Franchise Owner
The Franchise Agreement is the first document a franchisee should consult if they are considering to sell their franchise. This agreement will always give the franchisor the right to veto the sale of a master franchisee’s or franchisee’s business to an unsuitable third party.
The Operations Manual may supplement the Franchise Agreement and provide further detail on how to conduct the transfer or assignment of a franchise. Without any formalised response within 42 days refusing the franchisee’s request, the franchisee is entitled to infer that the franchisor has accepted the request to sell.
There are a number of obligations a franchisee should fulfil in preparing the sale of the franchise. This includes:
- first right of refusal for the franchisor to purchase the franchise;
- an assignment fee;
- interview by the franchisor of the prospective purchaser;
- approval of the prospective purchaser as a suitable franchisee by the franchisor;
- payment for the training of the new purchaser by the existing franchisee;
- payment of all outstanding accounts and fees to the franchisor and suppliers prior to
- assigning the franchise agreement;
- trade restraints to ensure you cannot open up as a competitor, or continue to use any of
- the intellectual property or systems;
- transfer of business registrations to the new owner or back to the franchisor;
- return of operations manuals and associated documentation; and
- surrender of:
- all client lists and details;
- the business phone and fax numbers including mobile phones;
- email or web page addresses
The Franchising Code of Conduct sets out that the franchisor can refuse to consent to a purchaser, but the franchisee can demand answers in writing and challenge answers but only if well organised. If the franchisor fails to respond within 42 days, the Code can require consent for the sale will occur.
Costs of Selling a Franchise
There are a number of various costs and fees involved with selling a franchise, in addition to costs from the franchisor. These include:
- business agents fees and advertising;
- landlords costs to approve the incoming franchisee;
- the franchisors costs which can be a fixed fee or a percentage of the sale price;
- Capital Gains Tax on eventual sale
- You will need to notify the franchisor for their approval before selling your franchise.
- If the franchised outlet is being operated under a lease agreement, during the transfer/sale, the lease itself will either need to be transferred to the purchaser or a new lease negotiated.
- There are ongoing obligations for the ex-franchisee, even after sale.
Process in Selling a Franchise as a Franchise Owner
A franchisor will apply the franchise system’s then-current franchisee selection criteria, which may be more stringent than the time when the selling franchisee originally joined the system. Any potential buyers must meet the financial obligations of operating the franchise and complete any required training programs. The franchisee owner may be required to pay an additional assignment fee, and the seller may be financially responsible for the cost of training the buyer.
Before the sale, franchisee owners must not be in default of any obligations to third parties or the franchisor. Moreover, they must not be in breach of the franchise agreement.
Franchise sellers may be required to transfer the commercial lease to the buyer. This may require a review of the terms of the lease for any restrictions on transferability.
Franchise sellers must be aware of any non-compete agreements, including any particular territory or period where they cannot operate a competing business. This includes contacting customers of the franchise.
No Unreasonable Denial
If permitted in the Franchise Agreement, a franchisee who wishes to sell the business to a third party must make the request in writing to be approved by the franchisor.
Frequently Asked Questions about Selling a Franchise
Q: What is the right of first refusal?
A: In most franchise agreements, a franchise seller is required to offer the franchisor the franchise at an agreed price, before selling it to a third party. In some franchise agreements, selling to third parties directly is not permitted at all.
Q: How would a trade restraint affect me?
A: Trade restraints are imposed by franchisors to ensure you cannot open up as a competitor, or continue to use any of the intellectual property or systems;
Q: What is a franchise royalty fee?
A: Franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly), often determined by the percentage of sales or a pre-determined flat fee.
Q: When I sell my franchise, does the exclusive territory still apply for the new buyer?
A: yes; however, this should be discussed with the franchisor. Where the franchised business is to be operated from a single location, the franchisee may receive exclusivity solely to that site or a market area usually a set distance surrounding the location.
How can LegalVision help me?
LegalVision provides businesses and individuals with tailored online legal advice, including assistance on selling your franchise. Our expert franchise lawyers provide fixed prices for your certainty and peace of mind. Call LegalVision today on 1300 544 755.