If you are a franchise owner looking to sell, you will have a myriad of legal documents to sign and several formalities to comply with. Here is a quick guide to help you navigate the legal considerations when selling your franchise.
Refer to the Franchise Agreement
The standard franchise agreement details the buying and selling requirements for a franchise and includes clauses covering the process of selling and transferring ownership, assets and liabilities. Some agreements allow the sale of the franchise back to the franchisor, or other franchising partners who may wish to buy the franchise. In some cases, the franchisor may also assist the franchisee in the sale. For external buyers, franchisors have set requirements that potential buyers must meet and also have the power to veto the sale.
Such requirements for buyers may include training programs for the new franchise owner and/or a set of selection criteria that must be met. Other requirements may also be detailed such as investment in required equipment and processes and service areas. Referring to the agreement beforehand will simplify the process smoother for the franchisee and buyers to comply with.
Right of First Refusal
The right of first refusal may be one of the obligations a selling franchisee has to abide by under the Franchising Agreement. Under this, the franchisee must give the franchisor the right to buy the franchise on the same terms and conditions that you offer to your other buyers. If the franchisor is unwilling to make the purchase, the offer can be extended to other buyers and you can proceed with the sale.
Contract
The business sale contract should be drafted by brokers or lawyers and it is best you consult a franchising expert at this stage to assist with the contract. For franchises, there are specific conditions included such as clauses from the seller’s original franchising agreement. They will detail what conditions have been imposed by the franchisor which will apply to that particular sale.
The contract should also consider who will be paying the franchisor’s fees, the sale and takeover of any assets and pending liabilities, payment of training and assignment fees, etc. Sellers may choose to pay the training costs and the buyers cover the assignment costs based on the negotiations between the two parties.
Franchisor’s consent
After the contract is signed, the seller is required to get the franchisor’s consent for proceeding with the sale. As a seller, you are required to provide all information to the franchisor in order for them to consider the sale. The Franchising Code of Conduct sets the limit for franchisors to respond and consent to the sale or offer advice within 42 days of receiving the documents. During this time, they have the right to request further information and any documentation that will assist in making an informed decision. After giving consent, the franchisor can revoke their approval within 14 days, but they must do so reasonably.
If the franchisor does not express any objections to the sale contract within 42 days, it is implied that they have consented to the sale. This consent cannot be revoked, unlike expressly stated consent which can be revoked at a later stage.
Franchisor’s documents
Both the buyer and the seller will have to sign documents with the franchisor to both initiate and terminate the relationship, respectively. The buyer will have to sign the new franchise agreement set out by the franchisor which may have conditions different to those of the current franchisee’s agreements.
You, as the seller, will have to sign a termination deed which officially signals the end of the business relationship. This will include the release of claims, which stresses that from that point forth, the seller cannot take legal action against the franchisor for any incident that took place during the franchising relationship. Sellers must also ensure that all legal, business and financial matters between them and the franchisor have been resolved before the sale. They must not default on any obligations as a franchisee and are not in breach of the initial franchise agreement.
Transfer of Assets and Lease
Any financial assets or agreements or any equipment from the previous franchisee needs to be handled diligently. The seller can choose to close the agreements when selling the business or transfer ownership to the new franchisee. These negotiations can be included in the sale contract.
For leased premises, the landlord will have to be involved to assign your current lease or to grant a new one to the buyer. Similar to the franchise sale, the landlord will have to approve of the new buyer as a tenant for the lease transfer to take place.
Consult Professionals
When selling a business, multiple professionals get involved. A seller will generally consult with an accountant for financial matters and the valuation of the business. A real estate appraiser will be required to value the commercial value of the property which adds to the business value. A lawyer will be engaged to write contracts, negotiate terms and ensure compliance with all legal and regulatory formalities.
The same applies to franchisees, rather it’s even more critical for franchisee sellers to engage the right professionals. Since the legal and contractual obligations when selling a franchise are more intricate and complex, it is advised to opt for a specialist lawyer who can help you get the best of the business deal you’re about to make.
Key Takeaways
- The franchise agreement contains details about obligations when selling a franchise. It’s best to refer to them before starting the sale process.
- Franchisors have the right to the first refusal. Their approval also needs to be sought before selling to other prospective buyers.
- A contract is drawn up dictating the terms of the transfer and may include the details about the transfer of ownership of any assets, liabilities or leases.
- Both buyer and seller have to sign the franchisor’s documents for the sale to go through.
Looking for a Franchise Legal Expert?
Lazarus Legal offers expert franchise legal services including negotiating franchising agreements, contracts, compliance with Franchising codes and assisting with sales, and transfers of business transactions. Our lawyers are highly qualified to offer legal advice and negotiate franchise contracts with prospective investors looking to enter the Franchising business. Connect with our team today to get the best legal advice for your business.
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