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The franchise arrangement between a franchisor and a franchisee is mainly dictated by the franchise agreement. The franchise agreement generally sets out the clauses allowing the parties to sell the franchise. Therefore, when determining the rights of both parties if the franchisor sells the franchise, it is essential to refer back to the franchise agreement.

Circumstances Surrounding the Sale of the Franchise

The franchisor may sell their rights to a franchise for various reasons. A common reason for selling a franchise is due to a corporate restructuring. Corporate restructuring may allow the franchisor to change the make-up of the corporate entity. For example, different shareholders may transfer to a related entity, but ultimately, individual parties may still have control.  This may be less of a worry for the franchisee as it is likely that the primary decision-making powers of the corporate entity will remain the same. In this instance, the nature of the amendment is more so administrative.

The franchisor may also consider selling the franchise to an external third party. If a franchisor no longer wishes to continue operations of the franchise, they usually sell to an external third party. The franchisor may be forced to sell the franchise in the case they are insolvent or in external administration. This may be more of an issue for a franchisee as they will then owe obligations to an external party. 

Franchisee’s Options in the Franchisor’s Sale of the Franchise

As noted above, the franchisee’s option in the case of the franchisor’s sale of the franchise largely depends on the terms of the franchise agreement. Many franchise agreements provide the franchisor with complete authority to transfer their rights in the franchise agreement without consent from the franchisee. This may be an issue if a franchisee initially enters an agreement based on the franchisor’s expertise or reputation. If the franchise agreement does not require the franchisee’s consent prior to the transfer of the franchisor’s rights,  the franchisee needs to negotiate the terms before entering the agreement, to ensure that the franchisor considers their rights.

Possible terms for negotiation may include the requirement for:

  • notice prior to a transfer taking place;
  • the franchisor to consult with the franchise network prior to the transfer taking place;
  • the new franchisor to enter a franchise agreement with the franchisee;
  • the new franchisor to agree to the same terms and conditions of the franchise agreement with the franchisee; and
  • the franchisee to have a choice to exit/ terminate the franchise agreement if the franchisor decides to sell the franchise.

Key Takeaways

Franchisees enter franchise agreements for a myriad of reasons and quite often the expertise of the franchisor in managing and operating a franchise is a large influencing factor. If this is the case and the franchise is concerned about the potential for the sale of a franchise during the term of the franchise agreement, they should review the franchise agreement thoroughly and negotiate terms accordingly to address their interests. If you have any questions or need advice reviewing your franchise agreement, get in touch with one of LegalVision’s franchise lawyers on 1300 544 755.

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