Considerations for Selling a Franchise Business
For every beginning there is eventually an end, and the same goes for franchises. So, if you want to end your franchise agreement, here are a few things that you need to consider.
Know your exit strategy
When it comes to selling a franchise business, your franchise is usually one of two: a success or a franchising failure.
In either situation, the franchisee’s right to sell the franchise will be regulated by the transfer provisions in the agreement of the franchise business for sale.
Generally, franchise agreements contain strict limitations on the franchisee’s ability to sell his/her franchise. This enables the franchisor to ensure that he/she has the final say over who they are to do business with and who can trade under the brand’s name. This also governs the use of proprietary systems and methodologies.
Franchise Agreements typically include the following stipulations:
- The purchaser must meet the franchisor’s (then-current) qualifications for any new franchisees.
- The purchaser must sign the franchisor’s (then-current) franchise agreement.
- The franchisee must cure all defaults (including payment defaults) under the franchise agreement prior to the sale.
- The franchisee must execute a general release, waiving all potential lawsuits against the franchisor.
- The final approval of the financial terms of the sale will be up to the franchisor.
- There will be a fee for the transfer and the necessary payment will need to be made.
Clauses/Restrictions within the Franchise Agreement to consider
1. Right of First Refusal to Repurchase
A key clause in almost every franchise agreement is the franchisor’s Right of First Refusal (ROFR) to buy back the franchise. This clause states that if the franchisee finds a purchaser for the franchise, the franchisor can intercede and buy the franchise on the same terms that were offered to the third-party buyer.
A ROFR or first refusal provision can make it much harder to obtain potential buyers.
Potential buyers can also be deterred by going through an extensive investigation, analysis and the process of acquiring financing, only to have the deal taken off the table at the very end by the franchisor.
2. Post-Termination Obligations
The final clause that cannot be over-looked is the Post-Termination Obligations. When deciding to put a franchise business up for sale, franchisees need to be aware of the continuing obligations they still have after they exit the franchise system.
The most important of these restrictions are the non-competition and non-solicitation contracts in the franchise agreement.
If you are a specialist in a certain field, and your franchise operates in that specific field, you need to make sure that you will be able to continue making a living, even if you are contractually prohibited from operating a competing business for the few years.
Similarly, even once you have sold your franchise and are permitted to start a competitive business, you may still be prohibited from taking advantage of the old customer base acquired during the term of your franchise agreement.
Therefore, when signing a franchise agreement, make sure that you are careful about fully analysing every condition and ramification of both buying and selling the franchise.
It also vital to remember to end the relationship with your franchisor on a good footing. This will enable you to move forward successfully with future franchise opportunities.