Selling a franchise can be an exciting step for a business owner, but it can also be quite a lengthy process. It also involves lots of careful reviews of the relevant documents and laws, so you want to make sure everything is done correctly before transferring ownership.
For example, you need to carefully review your Franchise Agreement or seek help from an accountant. You’d also need to do your research on the selling market and decide who your ideal buyer would be, so you can be 100% set on your selling price.
The most important thing, of course, is that you need to run everything by your franchisor. Generally speaking, they have lots of control over the sale of your business, such as whether a potential buyer is suitable. So, you need to tell them everything and make sure you have their permission before making any final decisions.
Can I Sell A Franchise?
The simple answer is yes, but this depends on the terms in your Franchise Agreement. You need to check whether your franchisor has set out terms that limit the way you manage and sell the franchise.
For example, you may have come across a right of first refusal. This just means that you need to give the franchisor the option to buy the franchise first before you sell it to anyone else. If they refuse, only then can you put it up for sale. In other words, sell it back to the franchisor first as they are a priority.
As a franchise seller, you will also be subject to ACCC and the Franchising Code of Conduct (the Code), so make sure you’re up to date with these regulations (the Code was updated recently – we’ll cover this shortly).
The takeaway is that you CAN sell your franchise if your agreement allows you to, and you have your franchisor’s consent to do so.
The process should look something like this:
- Give franchisor written notice
- Tell franchisor details about potential buyer e.g. their financial stability or range of experience
- Franchisor gives consent
You also have a duty to ensure you haven’t breached any terms in your Franchise Agreement, as this could hinder your sale.
What Does My Franchise Agreement Say?
Like we mentioned, whether or not you can sell your franchise should be set out in your Agreement. Your first step would be to check if there are any terms that could affect the sale of your franchise.
For example, some franchisors need the franchisees to sell the franchise back to the franchisors. This means the franchisee doesn’t actually have the freedom to sell it to who they want.
What you can and can’t do as part of the selling process really depends on who your franchisor is, and what terms they have provided. Some franchisors give little to no wriggle room, and others will happily let you take the reins. It’s a good idea to have a chat with them about this, and they might even give you advice on how to complete the process correctly.
Some examples of franchisor’s conditions include:
- The buyer needs to satisfy criteria set out by the franchisor or the relevant training program
- Paying an assignment fee (percentage of the sale price)
- Upgrade equipment
I Decided To Sell My Franchise – What Are My Obligations?
Selling a franchise comes with a lot of responsibilities on your part. The first place you should look at is the Code, as it sets out rules on what you can and can’t do during the selling process (and the franchising arrangement in general).
Here, we’ll go through some of the key things you should prepare for and organise leading up to the sale.
It’s important that you sell your franchise for a price that truly reflects its value as a business. The best way to do this is to get an appraisal provided by a real estate appraiser (you may also want to chat with your franchisor to get a clear idea of the sale price).
Once again, you may also need to check your Franchise Agreement as there might be terms that prevent you from negotiating a sale price. For example, if you are required to sell the franchise back to the franchisor, there might already be a sale price or a price range in the Agreement that you cannot change.
Otherwise, the sale price should generally be based on the level of competition in the market.
Similar to selling a business, you should have a contract setting out the terms of conditions of sale. This is commonly known as a Franchise Sale Agreement. It’s good business practice to have one drafted by a lawyer or a business broker.
The contract should:
- Be consistent with the terms of your Franchise Agreement
- Be consistent with the requirements of the Code
- Specify who pays the franchisor’s fees
- Cover details around the payment of an assignment fee and training fees
- Cover details around IP transfers and business registration
You should also give the buyer copies of your financials and other relevant documents as set out in the Code. After this is all settled, you can look into having a Deed of Termination drafted to formally end your agreement with the franchisor, and allowing a new agreement to come into place.
Note that once the sale is complete, you cannot take legal action against the franchisor.
Under the Code, you also need to give potential buyers a Disclosure Document before they enter into any Agreement with the franchisor. This will set out the details around how the franchise arrangement works. For example, how will the franchisee pay royalties to the franchisor, and how frequently will this occur?
Like any other sale of business, you also need to provide relevant financial documents like tax returns and balance sheets. We’ve written more about what documents you might need to prepare leading up to a franchise sale here.
Similar to a disclosure document, franchisors need to provide prospective franchisees with an Information Statement before they enter into any franchise agreement.
This information statement usually covers the risks that are often associated with franchising, due diligence obligations and other common questions or concerns that franchisees may have.
After all, franchising is a heavily regulated area, so there’s a lot for the franchisee to be aware of before they dive into a franchise.
According to the Code, you need the franchisor’s consent to sell the business within 42 days, and this consent can be withdrawn within 14 days.
If your franchisor refuses, you cannot sell the franchise.
If the lease is under your name, make sure you transfer the lease to the new owner, otherwise you’ll still be required to pay for it! In this case, you’ll need the landlord’s consent to assign your lease, or grant a new one to the buyer.
Once again, you need to check your Agreement in case there are clauses that can affect the transfer of your lease to someone else (remember the right of refusal!).
Transferring a lease requires another process, such as approving the buyer as the new tenant and discussing how payment will be made. It’s good practice to ensure these requirements are followed closely to avoid any issues later down the track.
When you’re selling a franchise, it’s important that the new owner can fulfil the relevant obligations to the expected standard. So, as the old owner, you have an obligation to train the new owner about what they need to do (or what not to do) under certain laws, conditions, contracts or according to what your franchisor has set out.
It might help to stay with the business for a little while after you’ve transferred ownership, just to make sure that things stay on track. This will also ensure a smooth transition, so the franchisor can rest assured that the franchise is still in good hands.
Check Franchise Code Changes
We’ve mentioned the Code a few times as it’s arguably one of the most important aspects of franchise relationships. There are heavy penalties for breaching the Code, which you can read about here.
On 1 July 2021, some changes were made to the Code which will affect the sale of franchise businesses also. Here, we’ll provide a brief summary of the key changes that would be relevant to a business sale.
- Dispute resolution
Previously, the only available method of ADR in a franchise arrangement was mediation. Now, we have conciliation and arbitration as well. This gives sellers and buyers more allowance to sort out any issues that may arise during the selling process.
- Key facts sheet
The new code now requires the provision of a key facts sheet to the franchisee before they enter the agreement. It should set out disclosure obligations in relation to a franchisor’s interest in a lease, and What Happens At The End Of A Franchise Agreement.
- Reviewing documents
The old code allowed the franchise to be transferred to the buyer without additional disclosure by the franchisor. However, the new code now requires that the buyer has 14 days to review all documents to be signed, giving the buyer the same disclosure entitlements as a ‘new’ franchise.
After entering a franchise agreement, there is a ‘cooling off period’. The new code changed this period from 7 to 14 days, giving more time for the buyer to change their mind.
There is also no longer a right to immediate termination. Now, this kind of termination requires 7 days notice. So, there are opportunities for ADR.
We’ve written more about the changes to the Franchising Code here.
Can I Ask For Help?
The selling process can be complicated and even daunting. So, it’s actually encouraged that sellers seek help from professionals when selling a franchise. Things get complicated with Franchise Agreements and looking for the perfect selling price.
You may want to:
- Speak to a franchise lawyer
- Consult an accountant
- Consult a real estate appraiser to determine total sale value of franchise
That said, there’s nothing wrong with doing it yourself, too! After all, you know your business well, so you’d know what your franchise is worth and how to sell it to the right person.
Helpful Tips For Selling
The selling process can be a long one, so it’s important to be patient. Here are some other tips to ensure a smooth transition.
- Always check that every step you take is compliant with the Code
- Make sure all your financials are updated and double checked (see an accountant)
- Check for any ongoing obligations even after you sell the franchise (this should be in your franchise agreement, so have a lawyer review this carefully)
- Make sure you keep records of what is agreed upon between parties in the selling process in case any issues arise later down the track (for example, the buyer might change their mind)
- Do your research on the market so your selling price is valued correctly
- Organise all your documents and equipment (for example, do you have any loans to take care of?)
- Make sure you grant access to relevant things (for example, do you need to grant access to systems, customer data, IP)
- Try to sell earlier, as this will invite higher prices. This is because more buyers will want a business that was recently listed rather than one that has been untouched, giving the impression that it is undesirable or unprofitable.
- Don’t get too distracted by the sale – it’s still business as usual. Keep things up and running and continue to make it profitable leading up to the sale.
- Make sure you are 100% transparent with the franchisor. Everything needs to be run by them. You may also want to seek help or advice from them when it comes to selling the franchise.
Post Sale Obligations
Let’s say you’ve found the perfect buyer and the process is almost complete. What now?
Well, it’s likely that your franchisor will impose a restraint of trade or non-compete clause on you. Since you’ve had access to some valuable trade secrets and inside information, this will prevent you from working for a similar business or a competitor in the market for a duration of time set out in your agreement (we’ve written more about restraint clauses here).
You may also be expected to train the new owner for their new position, so the franchisor is confident that the business is being managed well. This might involve you working for them as an employee for a little while before you officially leave.
Also consider your continuing obligation of good faith, which is set out in the Code.
Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
Selling a franchise is a big step, and it can get quite messy if you’re not too sure about your obligations. You need to regularly check the Code, your agreements and continue running your business, so it can be overwhelming.
Sprintlaw has a team of experienced lawyers who can help you sort out your legals. Whether it be reviewing your Franchise Agreement or deciphering your obligations as a franchisor, we’ve got you covered.
You can reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for an obligation-free chat.
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