On-selling your franchise: what you need to know
Like any business, once you establish your franchise the ideal goal is to build goodwill then on-sell it in the future for a profit.
While this may not be your short-term goal, it should nevertheless be kept in mind.A franchise is an investment. So long as you have a franchise agreement in place you will have the right to sell your business and the franchisor cannot unreasonably withhold their consent to the sale. Like any business, the more profitable and successful your business is, the higher the price you can sell it for.
The process for selling a franchised business is different from a standard business and there are some important things to consider before selling:
Check the franchise agreement
The first step should be to carefully check the provisions of your franchise agreement covering transfer and assignment as there’ll be a process which must be followed. Every franchise system is different. Some will require you to obtain the franchisor’s prior consent to your advertisement before you list your business on the market or to the terms of your sale contract.
Some general conditions found in franchise agreements include:
The buyer meeting the franchisor’s selection criteria and completing the franchisor’s training program.
The payment of an assignment fee which will be a set amount or a percentage of your sale price.
Upgrade or refurbshment to your premises and/or equipment.
Right of first refusal
Many franchise agreements give the franchisor the right of first refusal. This means you must give the franchisor the opportunity to buy the business on the same terms and conditions as being offered to your buyer. If the franchisor does not take up the offer, only then can you proceed with your sale.
Your business broker/agent or lawyer will generally prepare the initial draft of your business sale contract.
You will need a set of special conditions specifically drafted for the sale of a franchised business which should reflect any requirements under your franchise agreement and any conditions the franchisor has imposed on the sale. It’s very important that your contract is reviewed by a lawyer before you sign it.
The contract should specify who pays the franchisor’s fees. Generally, the seller will pay the assignment fee and the buyer will pay the training fee, however this is always up for negotiation.
Contracts are often subject to due diligence, meaning you’ll need to give the buyer copies of your financials for the business.
Once the contract is signed and you have provided all the information the franchisor reasonably requires to consider the sale, under the Franchising Code of Conduct (Code) the franchisor has 42 days to advise whether or not it consents to the sale. Once the franchisor grants consent they then have 14 days to withdraw it, but they must have a reasonable basis for doing so.
Signing the franchisor’s documents
The franchisor will generally require the buyer to sign a new franchise agreement for the balance of the term left on the seller’s franchise agreement. This is usually the franchisor’s then-current form franchise agreement on different terms and conditions to your agreement. Remember that the 7 day cooling off period under the Code doesn’t apply to the transfer of an existing business.
The seller should expect to sign a termination deed to formally end the existing franchise agreement. These generally include a release of claims, meaning once the sale is complete the seller cannot then bring legal action against the franchisor for any matter which occurred during the course of the franchise relationship. You’ll also be bound to any restraint under your franchise agreement.
The franchisor’s legal costs of preparing these documents will also need to be paid.
If you lease a premises then you will need to obtain the landlord’s consent to either assign your lease or grant a new lease to the buyer. Just like the franchise agreement, your lease will have a specific process to be followed. This will generally include the landlord approving the buyer as a tenant and the payment of the landlord’s costs.
If you have a finance or rental agreement over any of your business’ equipment then you must either pay out the loan or organise for the agreement to be transferred to the buyer before settlement.
Finally, be patient and don’t lose sight of your goal of walking away with a profit. The sale process generally takes at least a couple of months and there are multiple parties involved with competing interests including you, the buyer, the franchisor, the landlord and banks for you and the buyer.
Authors: Luke McKavanagh and Peter Rouse, Rouse Lawyers