Many business owners worry that they will be unable to sell their franchise if they want to exit the business for whatever reason. Understanding what you would need to do to sell your franchise, even if you are not thinking about it just yet, is important for the owner of any franchise business.
The sale of a franchise business is much the same as a normal business sale but is complicated by the addition of a few extra hurdles to jump over before money and keys can exchange hands between buyer and seller. You will need to comply with both the franchise agreement and the Franchising Code of Conduct throughout the sale process and ensure that all requirements are met.
The sale of a franchise business also means that there is another party involved in the transaction (namely the franchisor and/or their solicitors) who will have certain requirements which need to be met during the process. This can pose additional challenges.
Conditions in your Franchise Agreement
The most important step in selling a franchise business is to understand the requirements of your franchise agreement, the steps to transfer your business and the franchisor’s rights.
The franchise agreement you entered into when you became a franchisee will more than likely include a provision which restricts you from selling your franchise without first obtaining consent from the franchisor. Before providing consent your franchisor may want to obtain and review certain information from the prospective franchisee to determine if they are a suitable candidate for the franchise business. Your franchisor’s consent could also be subject to a number of other conditions including the prospective franchisee undertaking any relevant training, all amounts owing to the franchisor being paid up to date and the execution of any documents the franchisor deems necessary to document the assignment of the franchise agreement.
Your franchise agreement could also include a ‘first right of refusal’ requiring the business to be offered to your franchisor before it is offered to the public and the process for this to occur. Not adhering to these requirements could result in a breach of the franchise agreement affecting both the sale and your franchise business.
Requirements of the Franchising Code of Conduct
It is also crucially important that you understand the requirements of the Franchising Code of Conduct when selling a franchise business, this will help put you in the driving seat with the franchisor and the buyer.
The Franchising Code of Conduct sets out a number of requirements with respect to the transfer of a franchise agreement including that:
- a request for franchisor’s consent must be in writing;
- the request for franchisor’s consent must include all information the franchisor would reasonably require and expect to be given to make an informed decision;
- the franchisor must advise in writing whether consent is given and if it is not given the reasons why not; and
- the franchisor must not unreasonably withhold consent.
Often, franchisees worry that their franchisor may simply not co-operate with their proposed sale after-all what is in it for them?
However, the Franchising Code of Conduct seeks to prevent this and requires that if the franchisor does not advise in writing that consent has been given within 42 days (of the later of the date the request is made; and the if the franchisor seeks further information – the date the last of the information is provided to the franchisor) then consent is taken to have been given and that consent is irrevocable.
These are just some of the conditions that the Franchising Code of Conduct sets out with respect to a transfer of a franchise business. It is imperative that the requirements under the Franchising Code of Conduct are understood and met in order to ensure a successful sale of your franchise business.
Carefully Drafted Contract Conditions
In order to protect your interests, the business sale contract must state that the settlement of the sale is subject to and conditional upon you obtaining franchisor’s consent to transfer the business. The business sale contract must also allow you sufficient time to obtain franchisor’s consent.
If your franchisor does not consent to the transfer of the franchise this will leave you unable to complete settlement. In those circumstances, if your contract does not include a condition which makes settlement of the sale conditional upon you obtaining your franchisor’s consent, the buyer may seek damages from you for losses they have suffered, including but not limited to their legal costs.
Other matters to consider
- Restraint of trade – your business sale contract will likely include a restraint of trade restricting you from conducting certain activities that are in competition with those of the business you are selling, within a certain distance from the business premises and for a certain period of time following completion of the matter. When selling a franchise business it is important to review the restraint of trade contained in your franchise agreement (if any) as this restraint could be for a longer period of time, within a broader area from the business premises and may even restrict additional activities.
- Transfer of Lease – if the business operates out of leased premises, you will also need to consider the assignment of your lease for the premises. This process will be dependent upon whether you or your franchisor is the tenant under the Lease. If your franchisor is the tenant there will likely need to be an assignment of the licence to occupy and the landlord will drive this process. If you are tenant you will need to assign the lease yourself and your landlord will provide the documents for the assignment.
These are just a number of key issues that you will need to be aware of when selling your franchise business and, as you will see, knowledge of your legal documents and the statutory requirements under the Franchising Code of Conduct are key to a successful sale.
If you require any assistance with the sale of your business or with any other commercial legal issue, please do not hesitate to contact our dedicated commercial team.
Ph: +61 7 4617 8777