Franchisees looking to sell their business — and even those not yet planning to do so — are being warned that selling a franchise can be much more complex than selling a regular business.
That is the cautionary tale being offered by Helen Kay, a partner at Creevey Russell Lawyers. And, she said, it is important for all franchisees to consider this, even if they aren’t looking at selling any time soon.
“The sale of a franchise business is much the same as a normal business sale, but is complicated by the addition of a few extra hurdles to jump over before money and keys can exchange hands between buyer and seller,” Ms Kay explained.
“You will need to comply with both the franchise agreement and the Franchising Code of Conduct throughout the sale process and ensure that all requirements are met.
“The sale of a franchise business also means that there is another party involved in the transaction (namely the franchisor and/or their solicitors) who will have certain requirements which need to be met during the process. This can pose additional challenges.”
Ms Kay’s colleague, commercial lawyer Tessa Knight, added that the sale of a franchise is often covered in the franchise agreement which, she said, can restrict the sale of the business without the consent of the franchisor.
“Before providing consent, your franchisor may want to obtain and review certain information from the prospective franchisee, to determine if they are a suitable candidate for the franchise business,” she said.
“Your franchisor’s consent could also be subject to a number of other conditions, including the prospective franchisee undertaking any relevant training, all amounts owing to the franchisor being paid up to date, and the execution of any documents the franchisor deems necessary to document the assignment of the franchise agreement.”
Ms Knight added: “Your franchise agreement could also include a ‘first right of refusal’ requiring the business to be offered to your franchisor before it is offered to the public and the process for this to occur.
“Not adhering to these requirements could result in a breach of the franchise agreement affecting both the sale and your franchise business.”
This makes it crucial to understand exactly what was agreed to under the franchise agreement. However, Ms Knight said that it is also important to understand the conditions set out under the Franchising Code of Conduct when looking to sell.
“Often, franchisees worry that their franchisor may simply not cooperate with their proposed sale; after all, what is in it for them?” she said.
“The Franchising Code of Conduct seeks to prevent this and requires that if the franchisor does not advise in writing that consent has been given within 42 days, then consent is taken to have been given and that consent is irrevocable.
“These are just a number of key issues that you will need to be aware of when selling your franchise business, and knowledge of your legal documents and the statutory requirements under the Franchising Code of Conduct are key to a successful sale.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.
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