Selling your franchise is a major commercial and financial decision. There are many reasons you might decide to sell your franchise. You may:
- be looking to move on or retire;
- have people interested in purchasing the business for more than you paid; or
- be looking to recover your investment or prevent further debt if things are not going well.
Whatever the reason, the sale must be executed in a certain way. This article explains how the process works.
Obligations Under the Franchise Agreement
The franchise agreement, disclosure document and operations manual explain how the sale will take place. When selling your franchise, you are transferring the rights and obligations you hold under the franchise agreement to the purchaser.
Before you sell your franchise, the proposed purchaser will be vetted by the franchisor. The vetting process will evaluate their financial position and make sure that they will be able to operate the business successfully. The franchisor must agree to the purchaser before the sale takes place. Under the Franchising Code of Conduct (the code), a franchisor cannot stop you from selling your franchise to someone without good reason.
However, the franchisor may be able to stop you from selling your franchise to someone if:
- the purchaser cannot meet their financial obligations under the franchise agreement;
- the purchaser does not meet any other reasonable requirements under the franchise agreement;
- you owe the franchisor money;
- the purchaser does not meet the franchisor’s selection criteria;
- the purchaser does not agree to follow the franchise agreement;
- you have not followed the franchise agreement; or
- the purchaser has not had the chance to read and understand the franchise agreement and the code.
When you decide to sell your franchise, try to maintain a good working relationship with your franchisor. Remember that the purchaser will be working with the franchisor for the remainder of the agreement.
First Right of Refusal
Your franchise agreement gives your franchisor the first right of refusal. Having first right of refusal means that your franchisor can buy the franchise from you themselves, either when you decide to sell or once you have found a purchaser. The franchisor is allowed to buy your franchise on similar terms to the deal you have agreed with the purchaser. First right of refusal is unlikely to affect your sale, but you should keep it in mind if you plan to sell the franchise at a reduced price to a friend or business partner.
Which Documents Are Required?
Every franchise is different. However, the sale of every franchise must follow the correct process. You will need several legal documents to complete the sale of your franchise. These include:
1. Sale of Business Agreement
The sale of business agreement explains the terms of the franchise agreement and officially makes the purchaser the new owner of the franchise. It also means that you are not held responsible for anything that the purchaser might do after the sale takes place. Make sure that the terms of the agreement are very clear to avoid disputes.
2. Deed of Surrender and Release
The deed of surrender and release allows you to leave the franchise agreement that you signed when you took on the franchise. To avoid having any debts or responsibilities after the sale, make sure you carefully review this document.
3. Lease Assignment
If you run your franchise at a particular location, such as a shop or building, you may have signed onto a lease for these premises. Depending on who signed the lease, a lease assignment may be necessary to transfer the lease to the purchaser. If you did not sign the lease yourself, the franchisor may have signed a ‘head lease’. This is the primary lease for the premises. In this case, you may have signed a sub-lease or licence under the primary lease.
There are two common scenarios for assigning leases. The process depends on whether:
- you hold the lease yourself, in which case your landlord will need to assign the lease to the purchaser and sign the lease themselves as well as obtain a signature from you and the purchaser; or
- you signed a sub-lease or licence, in which case the franchisor can release you from your sub-lease or licence through a deed of assignment and surrender.
The type of lease you have entered will also affect how a lease can be assigned. For example:
- A retail lease cannot be refused assignment to the purchaser without good reason. However, the landlord will require documents from the purchaser such as financial statements, business history and professional references before the lease is assigned; and
- A commercial lease may not allow assignment. It is best to speak with your landlord early about assigning a commercial lease.
4. Equipment Leases
If you use rented or leased equipment, you will have to transfer or assign the use of this equipment to the purchaser.
You can do this:
- through a deed of assignment; or
- by surrendering the lease.
If you surrender the lease, the purchaser can apply for the lease themselves.
You should also think about your plans once the sale takes place. Your agreement may contain a restraint of trade clause, which stops you from working in a similar business to the one you have left within a set time period after the sale. Restraint clauses must be reasonable. For example, they cannot extend for an unreasonable length of time or restrict you from trading far away from the business. If a clause is unreasonable or unfair, you may be released from it.
Selling your franchise is an important financial and commercial decision. If you are ready to sell, you will need to prepare several documents. There are agreements to be released from and assigned. These include:
- a franchise agreement;
- your lease; and
- any equipment rental agreements.
Follow all the correct procedures to avoid having any ongoing obligations after the sale. You should also check that any restraints in your agreements will not affect your plans for the future.
If you have any questions about selling your franchise, you can contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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