SELLING A FRANCHISE
Leading Franchise Lawyers | Greyson Legal
A Guide for prospective Franchisees considering selling their Franchised Business
One of the benefits of owning a Franchised Business is the ability to sell that Business asset. Although there are some similarities between selling a stand-alone small Business and the sale of a Franchised Business, there are a number of distinct differences and additional complexities to the transaction.
Obtaining sound legal advice regarding the "assignment" process and getting legal help with the franchise sale conveyance transaction is important to ensure all steps are properly taken.
At Greyson Legal we have the skills, knowledge and expertise to guide you through the various stages of the franchise sale process from start to end. For a no obligation and confidential discussion on how we can help you, please contact our office.
I am a Franchisee: How do I sell my Business ?
In the following sections we outline different aspects that you need to consider when looking to sell your Franchised Business.
Sale to New Buyer
The conventional approach is to negotiate the sale of the existing Franchised Business to an independent third party purchaser.
You may, for example, engage a business broker who markets your Franchised Business for sale or you might try and sell the Franchised Business directly yourself.
Some Franchisors may also assist you with marketing the sale of your Franchised Business, such as, through the corporate franchise website.
Whichever process is adopted, the end result normally involves:
- adopting a Contract of Business Sale between the Seller (as outgoing Franchisee) and the Buyer (as incoming Franchisee), which sets out the base terms and conditions of sale;
- an assignment of the existing Franchise Agreement (or the Buyer entering into a new version Franchise Agreement for the balance of the term under the existing Franchise Agreement);
- where applicable, assignment of any fixed premises lease (or occupancy licence); and
- dealing with other matters specific to the business conveyance process.
For further information, advice and assistance with the sale of your existing Franchised Business, contact us for a no obligation discussion.
Where you are seeking to sell your existing Franchised Business, the Franchise Agreement may contain provisions giving the Franchisor a so called "first right of refusal" to purchase the business from you. This would include a valuation method to determine the purchase price the Franchisor would be liable to pay.
If the Franchisor elects not to exercise this right, you can then proceed to sell the Franchised Business to a independent third party purchaser (subject to Franchisor conditions for consent).
Even if a first right of refusal mechanism is not set out in the Franchise Agreement, there may still be an opportunity to negotiate a Franchisor buy back of the existing Franchise Business.
A first right of refusal allowing the Franchisor a right to buy back the Franchised Business is normally only triggered if you decide voluntarily to sell. Franchise Agreements do not typically allow a Franchisor to unilaterally buy back a Franchisee’s existing Franchised Business without a triggering event, such as a proposed sale of the existing Franchised Business by the Franchisee.
If a Franchisor should contact you without any prior notice or negotiation insisting on a Franchisor buy back (and you are not interested in selling), you may not be under any legal obligation to sell to the Franchisor. As franchise solicitors , Greyson Legal can advise you of your rights and obligations.
SOME OF THE FRANCHISE CLIENTS WE PROUDLY REPRESENT
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The Franchise Agreement is the contract that exists between the Franchisor and Franchisee.
It will contain specific provisions dealing with the procedure to be followed if an existing Franchisee wishes to sell their Franchised Business (or assign the Franchise Agreement).
These provisions will vary depending on the franchise system concerned, but there are a number of conditions that are typically set out in regards to the process. For example:
- prior notice of the proposed sale being given to the Franchisor;
- is there a first right of refusal in favour of the Franchisor to purchase the Franchised Business ?;
- the Seller (as outgoing Franchisee) not being in breach of the Franchise Agreement;
- payment to the Franchisor of an assignment or "transfer" fee and the Franchisor's legal costs;
- the Buyer (as incoming Franchisee) being deemed suitable as a franchisee by the Franchisor;
- the Buyer satisfying the Franchisor's training requirements;
There will also be various other continuing (or post-settlement) obligations on the the Seller, such as:- non-compete, confidentiality and in regards to non-use of the Franchisor's intellectual property.
If you are considering selling your Franchised Business then it is critical to check the Franchise Agreement regarding your obligations before you do anything else.
Most Franchise Agreements will contain the core provisions regarding "assignment" under one or more headings within the body of terms and conditions in that document. But that is not always the case and it can be that provisions related to assignment or transfer are also contained in other section of the Franchise Agreement.
For that reason alone, it is prudent to engage franchise lawyers like Greyson Legal to review your Franchise Agreement and advise you of your obligations (and rights) under the terms and conditions of that document.
The Franchisor's Operations or Procedures Manual can also contain information about the process to apply when there is a transfer of a Franchised Business.
Seller's of existing Franchised Businesses should check this document when considering the sale of their Business.
Franchising Code of Conduct ("Code")
The Code sets out a number of provisions that relate to the sale of Franchised Businesses or the transfer of a Franchise Agreement.
For example, a Franchisor must not unreasonably withhold its consent to the transfer of a Franchise Agreement. It may be reasonable for consent to be withheld if the proposed transferee (Buyer) does not meet the selection criteria of the Franchisor.
When selling a Franchised Business, consideration therefore needs to also be given to the application of the Code.
Cooling Off Period
Unlike when entering into a new Franchise Agreement, where there is asale of an existing Franchised Business, the 7-day cooling off period under the Code does not apply.
The Buyer does not get the benefit of the protection afforded by the cooling off period.
There will be a range of other issues to address depending on the nature of the Franchised Business, such as:
- financial reports of the Business;
- dealing with debtors/creditors;
- plant & equipment;
- transfer of licenses (as applicable);
- releases of any encumbrances;
- the Business Name being transferred from the Seller to the Buyer;
subject to the terms and conditions in the Franchise Agreement and/or Contract of Business Sale.
Contract of Business Sale
Where there is a sale of an existing Franchised Business, there is also a contract that sets out the terms and conditions of the sale. For example:
- details of the Buyer and Seller;
- purchase price;
- date of settlement;
This Contract of Business Sale reflects the "agreement" between the Seller (as outgoing Franchisee) and the Buyer (as incoming Franchisee).
The Contract of Business Sale is often in a standard form but with applicable special conditions drafted to suit the circumstances of the sale. A typical set of special conditions within the body of that contract might say that the sale of the Franchised Business is subject to:
- the Franchise Agreement being on terms satisfactory to the Buyer;
- the Seller causing the Franchisor to give its consent to the sale/assignment of the Franchised Business;
Where a broker has brokered the sale of the Franchised Business, it is still important for you to obtain legal advice on the terms and conditions of the Contract of Business Sale before you sign. Otherwise, your rights my not be properly protected if the broker has missed key elements.
Deed of Consent
The Franchisor will also typically have its own Deed of Consent which sets out its conditions for giving consent to the transfer.
The Deed will to some extent reflect the conditions for transfer as set out in the Franchise Agreement, but will also contain other requirements - such as those to be imposed on the Buyer.
If the Franchised Business operates from a fixed premises, there will also need to be consideration given to:
- the terms and conditions within the Franchise Agreement and Contract of Business Sale in regards to leasing;
- the terms and conditions of any Lease or Occupancy Licence; and
- the requirements of both the Franchisor and Landlord in respect of obtaining their consents.
For example, the lease itself may either need to be transferred to the Buyer or a new lease negotiated.
There will be an array of issues to address, including:
- what is to happen with any existing bond, bank guarantee or security under the Lease;
- make good obligations;
- dealing with existing fitout;
At Greyson Legal we are familiar with leasing - we can review any lease documentation and advise you of the process on sale of the Franchised Business.
When considering selling your Franchised Business it will be worth while obtaining a valuation of the Business. This will assist in determining the sale price. You should contact a business broker or accountant experienced in valuations to provide you with an appraisal.
From the Seller's perspective it will be important to obtain advice from your accountant or taxation professional so that you are across any taxation implications of the sale. Such as, goods & services tax (GST) and capital gains tax (CGT) liabilities.
Restraint of Trade
The Franchise Agreement (and Contract of Business Sale) will likely contain provisions which restrict the Seller from:
- soliciting employees, suppliers and customers; and
- competing with the Franchisor and/or Buyer,
following settlement of the sale.
As franchise solicitors, Greyson Legal can advise you regarding your rights and obligations in relation to restraints.