Selling a franchise is an exciting step! We hope this will be your opportunity to profit from your hard work and the growth that you have achieved.
If you are a Franchisee and are looking at selling your Franchisee, you must follow the obligations in your Franchise Agreement, and you must adhere to the Franchising Code of Conduct.
Division 4 – Transfer of a Franchise Agreement
Division 4 of the Franchising Code of Conduct sets out the Franchisor’s legal obligations when a Franchisee is trying to sell its Franchise.
It sets out how a Franchisee can ask a Franchisor to request permission to sell the franchise and when a Franchisor can refuse that permission.
Asking for a Transfer
Asking for a Transfer is relatively simple. The Franchising Code of Conduct requires Franchisees to formally request permission to sell a Franchise by providing the Franchisor with a letter in writing to that effect. This means that a Franchisee must ask for the Franchisor’s permission to transfer the Franchise in writing. In addition, the Franchisee must provide the information that a Franchisor reasonably requires to grant that request (generally as set out in the Franchise Agreement), and any other additional information that a Franchisor may need. This includes information that a Franchisor may ask for even though it is not contained within the Franchise Agreement. This is because the Franchising Code of Conduct states that the Franchisor can have all the information that it needs to make an “informed decision”. In some cases, the Franchise Agreement may not require certain information to be provided, such as a bank statement from the purchaser. This however is a “reasonable” piece of information for a Franchisor to have in order to make an “informed decision”
Responding to the Request
When a Franchisor receives a request to transfer a Franchise, they must provide a Franchisee an answer, or a request for more information, within 42 days, otherwise they will be held to have given permission.
If the Franchisor refuses the sale, they must provide the Franchisee with a reason for rejecting the request. Alternatively, the Franchisor can give conditional permission, e.g. we will grant permission if you first resolve a breach of the franchise agreement. You have the opportunity to satisfy the condition and sell your franchise.
Cannot unreasonably withhold a request
To any Franchisee who wants to sell its Franchise, our Franchise Lawyers always ensure to bring to the Franchisee’s attention to Item 25(2) of the Franchising Code of Conduct, which states that:
A franchisor must not unreasonably withhold consent to the transfer of a franchise agreement.
This is important, as it means that a Franchisor cannot unreasonably refuse a sale of a Franchise. In other words, if for example, you have provided all of the information that the Franchisor asks for and the purchaser has all of the qualities that the Franchisor should expect, they cannot refuse the sale.
The next section discusses when a Franchisor can withhold permission.
When is it reasonable to withhold approval?
It is not unreasonable for a Franchisor to withhold permission if:
- the purchaser cannot meet their financial obligations under the Franchise Agreement;
- the purchaser does not meet any reasonable requirements under the Franchise Agreement;
- the purchaser does not satisfy the Franchisor’s selection criteria;
- the purchaser does not agree to comply with the Franchise Agreement;
- you have any money owing to the Franchisor;
- you are in breach of the Franchise Agreement; and
- the purchaser has not had an opportunity to read and understand the associated Franchise Agreement and the Franchise Code of Conduct.
These are examples, and there can be other reasons as to why a Franchisor may refuse permission. Any other reason must still be reasonable.
If you are trying to sell your Franchise, review the Franchise Agreement in detail. You should, however, also have an understanding of the Franchisor’s obligations so that you know what you can expect. If you want to sell your Franchise or are having trouble with a Franchisee selling, please contact LegalVision at 1300 544 755 for assistance. Our team of franchise lawyers will happily assist and provide you with a fixed-fee quote.