Many prospective Franchisees are aware of the much quoted mantra to “take independent legal advice” and many do take advice and embark on their franchise journey...
For many franchisees there will come a time when they wish to realise their investment and sell their franchise. Some franchisees are surprised by the process set out in their franchise agreements that they are contractually bound to follow when they want to sell. Some franchisees feel aggrieved by the level of control that their franchisor can exert.
The franchise agreement
To understand the rationale for the control the franchisor exerts, it is helpful to remember that a franchise, while independent from the franchisor as a financial and legal entity, is dependent on the licence rights granted to it by the franchisor. Without a current franchise agreement a franchisee has nothing to sell. The franchise agreement will typically contain provisions relating to a sale of the business.
Conditions of sale
It is standard practice for a franchisee to have the right to sell, subject to various conditions being satisfied. Generally these will include:-
- the franchisor having the right to review the terms of the buyer’s offer after and an option to purchase on the same terms
- the buyer satisfying the franchisor’s criteria as a prospective franchisee
- the buyer agreeing to sign a franchise agreement with the franchisor and attend the franchisor’s training course
- payment of commission where the franchisor has introduced the buyer to the franchisee
- payment of a fee to cover the franchisor’s reasonable costs in dealing with the franchisee’s application to sell
- payment of all monies due to the franchisor at the date of completion of the sale of the franchise
Standard Form of Resale Agreement
Increasing numbers of franchisors require the parties to use a standard form of resale agreement and to contribute towards the franchisor’s legal costs in dealing with the sale. If you are considering selling your franchise, it is advisable to review the provisions in your franchise agreement prior to entering into negotiations, so you are aware of the conditions that will need to be satisfied for the sale of your franchise to proceed with the franchisor’s consent.
If you require any legal advice on the sale of your franchise, please contact the Franchising team.
This article first appeared in Business Franchise Magazine in 2014