The sale of any business can be both exciting and stressful. If you are a Franchisee, the assignment of a Franchise will often present more hurdles and challenges than selling a traditional business.
Unlike an ordinary business sale – where you are in complete control from start to end – the terms of your Franchise agreement will dictate the entire process of your sale, which will usually require the assignment of your Franchise agreement.
What does your Franchise Agreement say?
The first thing you should review is your Franchise Agreement. What does it say in terms of the assignment?
Some things you should look out for include:
- Do you have the right to sell the Franchise?
- Does the Franchise Agreement require you to sell the Franchise back to the Franchisor
- What are the criteria for selling the Franchise (including the criteria for the prospective purchaser to meet before the Franchisor gives approval)?
- Is there a fee payable to the Franchisor for assigning the Franchise Agreement?
- Is there a training cost for the prospective purchaser – or do you need to train them yourselves?
- How will the sale price be determined – and will you get any goodwill compensation?
Many Franchise Agreements contain a ‘first right of refusal’ provision, requiring the seller to give the Franchisor the right to buy the Franchise before offering it to the public.
The Franchisor’s Consent
In almost all Franchise Agreements, you must obtain the Franchisor’s consent before selling the Franchise to a prospective purchaser.
Under the Franchise Code of Conduct, the Franchisor must decide within 42 days after the date of request or, if the Franchisor seeks further information, then the date that the last information was provided to the Franchisor. If the Franchisor fails to decide, consent is determined to be given and irrevocable.
If the Franchisor gives consent within 42 days, they can revoke it within 14 days, but they must do so reasonably.
Under subclause 6A of the Franchise Code of Conduct, a Franchisor may reasonably withhold consent or reasonably revoke consent in the following non-exhaustive circumstances:
- The prospective purchaser is unlikely to be able to meet the financial obligations under the Franchise agreement
- The prospective purchaser does not meet a reasonable requirement of the Franchise Agreement or the criteria of the Franchisor
- The prospective purchaser does not agree, in writing, to comply with the obligations under the Franchise Agreement
- The Franchisee has not paid or made reasonable provision to pay an amount owing to the Franchisor
- The Franchisee has not remedied any outstanding breach of the Franchise Agreement
- The Franchisor has not received from the prospective purchaser a written statement that they have received, read and had a reasonable opportunity to understand the disclosure document relevant to the Franchise, which must be provided, and the Franchise Code of Conduct.
You should also review all your agreements related to the Franchise, such as your property lease, for any ‘change in control’ provisions. For example, a change in control provision under a lease may require you to obtain your landlord’s consent to assign your lease to the prospective purchaser.
Suppose you are considering selling your Franchise and starting a similar business to escape the fees and conditions. In that case, you should take a step back and review the Franchise Agreement’s trade restraints – also known as non-compete provisions. A reasonable trade restraints provision will be enforceable and prevent you from operating a similar business to the Franchise within a set period and location after you assign the Franchise Agreement.
Before you consider selling/assigning your Franchise business, you should review your Franchise Agreement, communicate with the Franchisor and any relevant third parties, and determine what consents are required – and whether any trade restraint provisions will adversely affect you.
Most importantly, you should seek experienced legal advice!
Ryan Nguyen – Lawyer
Email: [email protected]
D +61 2 9895 9224 P +61 2 9895 9200