Selling any business can be complex and the sale of a franchised business usually involves a few extra critical steps.

Here are some of those additional issues that a franchisee may face when selling its business:

1. The franchise agreement process

Most franchise agreements stipulate that the franchisee cannot transfer the business without the franchisor’s consent. There are often detailed transfer/assignment clauses which set out the steps and pre-requisites to obtaining the franchisor’s consent.

The process and criteria can include:

• the required timeframe, format and content of any request for consent;
• any obligation for the franchisee to first offer the business to the franchisor and the process for the franchisor’s exercise, or rejection, of its first option to purchase the business;
• any obligation for the franchisee to provide information regarding the prospective purchaser and to satisfy the franchisor of the purchaser’s suitability as a franchisee;
• any obligations for the franchisee to train the purchaser;
• the franchisee’s obligation to remedy any outstanding defaults (if relevant);
• the transfer documentation to be signed by the franchisee and the purchaser;
• obligations regarding payment of any fees and costs, such as a Transfer or Assignment Fee,  any new Franchise Fee, and the franchisor’s legal costs associated with the transfer;
• any requirements for a re-fit or upgrade of any premises or vehicle used in the franchised business;
• any requirements regarding occupancy of the premises, such as a transfer of any lease or occupancy licence.

Franchisors also often have more comprehensive transfer processes set out in an operations manual or separate transfer policy, which must also be followed.

The Franchising Code of Conduct also governs some aspects of the process, stating that a request for consent must be in writing and the franchisor must not unreasonably withhold its approval. The Code also dictates that the franchisor is deemed to have consented if it does not give the franchisee its formal written refusal (including reasons) within 42 days of receiving the request.

Franchisees should familiarise themselves with and follow, the terms of the franchise agreement transfer process and procedures to make this a smooth and efficient sale process.

2. Factoring the franchisor’s requirements into sale negotiations

When a franchisee puts a business  up for sale, it is wise to take into account the franchisor’s requirements before determining the sale price and key terms. For instance, if the purchaser will be obliged to pay a fee to the franchisor or spend significant funds on a premises refurbishment, the franchisee’s asking price should be adjusted accordingly.

Similarly, in setting the proposed settlement date, the franchisee should allow sufficient time to enable all the necessary conditions to be satisfied.

Any key conditions, such as the fact that the sale is subject to the franchisor’s consent and the transfer of a lease, or subject to any payment, training or action on the part of the purchaser, should be confirmed in both preliminary negotiations and in the sale contract. 

If these matters are dealt with early, franchisees will reduce the risk of the sale being delayed or cancelled.

3. Lease or occupancy agreement

Where the business operates from premises and the franchisee holds a lease or sublease of the premises, the franchisee may need to transfer the lease or sublease along with the business or negotiate the grant of a new lease/sublease to the purchaser.

To avoid unexpected delays or impediments to the sale of the business, franchisees should take action early by approaching the landlord (sometimes via the estate agent or shopping centre management) to seek consent and attend to any requirements or conditions.

Franchisees should also negotiate with the purchaser to determine who will be liable for any costs of drafting the necessary documentation and of procuring the consent of the landlord and any mortgagee on title to the premises.

If the franchisor holds the lease and has granted an occupancy licence to the franchisee, the purchaser may be required to enter into a new occupancy licence and the landlord’s consent to such licence may need to be obtained.

4. Restraints

Franchisees are often bound by a restraint of trade for a period of time after the sale of the franchised business.  Such restraints usually prohibit the franchisee from operating or being involved in a similar or competing business, and from canvassing customers, suppliers or employees of the franchised business. Purchasers sometimes also seek to impose additional restraints in the sale contract.

Before selling, a franchisee should have a clear plan for any intended future employment or business ventures and should make contingency arrangements for deriving income without breaching any enforceable restraints.

5. Ongoing obligations

Some obligations imposed under a franchise agreement remain binding even after the franchise agreement ends. 

Franchisees should ensure they are aware of, and comply with, all such provisions; for instance those dealing with the use of confidential information or intellectual property, even after selling the business.

In addition, franchisees must deal with the multifarious issues that ordinarily arise when selling a small business, such as obtaining legal and accounting advice, giving due consideration to any tax consequences, preparing a “section 52” statement (if applicable), negotiating the deal and the terms of any contract, handling employees, suppliers and creditors of the business, transferring any business names, licences or permits and necessary service or supply contracts, calculating adjustments, attending to stocktake and cancellation of utilities.

Early preparation and clear communication with all relevant parties is key to achieving a smooth sale for a franchised business.

Esther Gutnick is a senior associate, MST Lawyers