The following steps should be taken when you looking to sell your franchise business:
- Plan to sell your franchise business, do your homework and seek expert advice from a specialised franchise lawyer and your accountant before you sell.
- Identify the risks and costs of your business.
- Don’t accept the first purchaser that comes along and avoid an offer subject to finance, if possible.
- Do your due diligence on the purchaser just as the purchaser will do their due diligence on you.
- Will the franchisor approve the prospective franchisee? Do you think the purchaser will be able to successfully complete training? Does the purchaser have the capital to acquire the business? Do they need to obtain finance? If so, how much and will they be likely to obtain that finance?
- Make sure your financial records are up to date and all your key legal documents in order and readily available.
The Code requirements on transfer or sale of a franchise
The Code (Clause 17.1(7)) requires that a franchisor disclose whether a right to transfer a franchise exists and, if so, the conditions of transfer. Even if there is no express provision for transfer in the Agreement, a franchisee may still request the franchisor’s consent to a transfer however there is then no contractual obligation on the franchisor to do so.
The Code (clause 20) provides that a request for franchisors consent to transfer or a novation of a franchise must be made in writing. The Code does not expressly require that there be a right to transfer or novation in a Franchise Agreement.
It is often assumed incorrectly by franchisees that there is a right to transfer however, this is not the case.
Careful attention should be given to the grounds for refusing consent in the Franchise Agreement. Are they reasonable? Do they comply with the Code? Franchisors can not contract out of the minimum Code requirements.
Most Franchise Agreements set out a procedure for a franchisee to assign their rights subject to the franchisors approval.
So what are reasonable grounds for a franchisor to refuse a transfer of a franchise?
Clause 20(3) of the Code sets out the grounds upon which a franchisor may withhold consent (I make additional comments in bold after each point);
(a) The transferee is unlikely to meet the financial obligations under the Franchise Agreement (for example the franchisee does not have sufficient assets and working capital needed to acquire the business and for example, fund a fit out upgrade).
(b) The transferee does not meet a reasonable requirement of the Franchise Agreement for transfer. This is open to broad interpretation and subjective assessment by the franchisor.
(c) The transferee has not met the selection criteria. This usually relates to the franchisee, for example not meeting basic training requirements.
(d) The transfer would have a significant “adverse effect” on the franchise system. This is open to the subjective opinion of the franchisor.
(e) That transferee does not agree in writing to comply with the obligations as a franchisee (a most curious provision and unclear when this would ever occur).
(f) The existing franchisee is in default of its obligations and has not made reasonable provision or can not pay amounts owing to the franchisor, even should it transfer the business (this does not seem unreasonable)..
(g) The franchisee has breached the Agreement at the time of transfer and not remedied that breach (again, not unreasonable).
Clause 20(4) provides a franchisor must, within 42 days after a written request for transfer, give the franchisee written notice that consent is withheld and reasons why. If the franchisor does not provide that consent in writing within 42 days of the request in writing, the franchisor is taken to have given its consent.
The process of transfer of sale by a franchisees business or rights involves a balance of the right of the franchisor to protect its interests, brand and reputation with the right (if expressed in the Agreement) of the franchisee to assign its business for value.
On a transfer or sale of the franchise business the Code, (Clause 6B) requires the franchisor to give its then current Disclosure Document to the incoming franchisee.