Posted by: Tom Wood | Date: 1 November 2012
Selling your franchised business can be a complex and stressful exercise. The transaction tends to be more complex than the sale of a non-franchised business sale due to the third-party influence of the Franchisor, who under most franchise agreements will have the final say in whether or not your sale can proceed. In some circumstances, the franchise agreement will require the franchisee to first offer to sell the business back to the franchisor before you can offer it to third parties.
The Franchising Code of Conduct (“the Code”) does not allow a Franchisor to withhold their consent to the sale of a franchisee’s business unreasonably, however what may be considered “unreasonable” may differ between businesses and the particular industry within which they operate.
It therefore makes sense that franchisees who intend to sell their franchised business should familiarise themselves with the criteria against which their proposed replacement will be assessed, before seeking out potential buyers.
What follows are some practical tips to ensure the sale of your business runs smoothly:
Most franchise agreements will contain an “Assignment” clause. You should identify the process set out in this clause to ensure you don’t inadvertently breach it. The most common breach is made when franchisees offer their business for sale without consulting the franchisor. You should get legal advice if you are not completely certain as to your obligations under this clause.
Just like your franchise agreement, your business premises lease will have an “Assignment” clause. Whilst many franchisors are currently moving away from this type of arrangement, your franchisor may hold the premises lease in their name and allow you to occupy the premises by way of a license agreement.
You should identify the procedure to obtain your landlords consent to assign the lease or license to the buyer of your business. Your legal adviser can help you with this. If you hold the lease as opposed to the franchisor, you should also identify the length of the current term and whether there are any upcoming option periods that need to be exercised for the benefit of the buyer. Your premises lease is a valuable asset of most businesses.
Given your franchisor will have the final say in the sale of your business, it makes sense to discuss your proposed sale with them from the outset. Many franchised systems have guides and other materials to walk you through your obligations under your franchise agreement in relation to the sale.
The other benefit is that the franchisor may have access to details of other franchisees or applicants for a franchise who may be interested in buying your business.
If you still wish to proceed with the sale of your business having identified the process required by your franchise, your next step should be to speak with the following people:
(a) Your Legal Adviser;
(b) Your Accountant;
(c) Your Financial Adviser.
These professionals will give you advice in relation to the array of considerations that you will need to take into account. Selling a business is a significant venture.
In many cases, a business broker who specialises in selling franchises will also be a great asset, and can help act as an intermediary between yourself and the buyer.
Selling a franchised business can be a drawn out process spanning a number of months. You need to factor into your envisaged settlement date the fact that in many cases the incoming franchisee will need to conduct training with the franchisor, which can be a quite lengthy undertaking.
Being realistic as to the date of completion for your sale will take pressure off all parties and avoid costly mistakes being made as a result of not obtaining considered advice from your advisers.
Please do not hesitate to contact me should you have any questions or queries in relation to the above.
See also Buying a Franchise.