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Franchises are an opportunity to run a business while having the framework, support and guidance of an umbrella company, the franchisor. Both the franchisee and franchisor enter into a Franchise Agreement and franchises are well regulated by the Franchise Code of Conduct.
However, the franchise model doesn’t suit everyone. The success of your franchise relies heavily on both parties operating their side of the business in good faith, with mutual respect and cooperation. This can prove difficult.
The franchisor has the entire business in mind and may make decisions that suit some franchisees and not others. The financial rewards may not meet the franchisee’s expectations and it can be many years before the initial buy-in fees have been recovered. This can lead to disenchantment with the arrangement.
It may be personal circumstances such as bereavement or divorce that force a franchisee to sell. Sometimes it just doesn’t work out and one of the parties elect to extricate themselves from the franchise.
One way to do that is to sell or transfer your franchise.
What Does The Law Say?
Fortunately, the law provides for this situation. The Franchise Code of Conduct sets out a process that must be followed to transfer a franchise and protects both parties’ interests.
The Franchise Code Of Conduct
Essentially, the process revolves around transparency by promoting full disclosure and sufficient notification, and it involves requesting consent, and ensuring consent cannot be withheld unreasonably. It also sets out some time frames.
As the franchisee, you must make the request in writing to the franchisor to consent to the transfer of your franchise. You need to provide all the information that the franchisor would reasonably require and expect to be able to make an informed decision, and if they request further information, you need to provide it.
The franchisor must give consent within 42 days of the request or explain why consent is not being given. It may be that there is a condition that needs fulfilling before consent can be given or other reasonable reasons can include the proposed franchisee’s unsuitability or financial instability or their refusal to agree to the franchise agreement terms.
The key is that consent can only be withheld for reasonable reasons.
If the franchisor doesn’t respond within the 42 days, then consent can be taken as given. There is also allowance made for revoking consent within 14 days if information such as above comes to hand.
Refer To Your Franchise Agreement
Broad guidelines are set out in the Code, but your Franchise Agreement will very likely dictate some of the details around transferring your franchise. Although it may not seem very relevant when you first enter into a franchise, it’s important that you check assignment or transfer fees before signing your agreement.
It’s something you might try to negotiate down while they’re excited to have you on board! We can help with that.
There is often a clause in franchise agreements that give franchisors first refusal to buy a franchise back. If they choose not to buy it, they may well have a significant say in who you can sell to.
Don’t forget that from the franchisor’s perspective, it’s exactly the same as when you bought in: the franchisor is entrusting any franchisee to grow their company, to safeguard their reputation and to bring in financial rewards. They need to be sure that your potential purchaser can do that too.
This is why there’s a cost to transferring a franchise. It takes time and money for the franchisor to assess the feasibility of the transfer and suitability of the potential franchisee that you hope to sell to.
What Should I Know About Transfer Fees?
Transfer fees should be outlined in the Franchise Agreement. They are intended to cover a range of costs associated with the process of transferring a franchise, that the franchisor passes on to you.
Whether or not the franchisor purchases the franchise or decides to consent to the transfer to a third party, they will need to do some research and vetting.
For example:
- The franchisor will probably seek advice and expertise from an accountant and a lawyer
- The vetting process takes time and money
- They may have to provide new training
- Licences may need name changes, such as for the premises
- Stationery and other goods or supplies may need changing
How Much Is The Fee?
The level of the transfer fee is set out in the Franchise Agreement, either as a minimum flat fee, or as a percentage of the sale price or the initial franchise fee, or a combination of the two.
There is room for negotiation, though. Remember, the franchisor wants the franchise to succeed. He has a vested interest in doing the best thing for his company. Quite often, if there is good faith and transparency, the franchisor will be aware of the issues facing the franchisee and support their decision to sell. The franchisor may even assist in finding a suitable purchaser.
In this situation, there is the potential to negotiate a combination of a reduced transfer fee and a finder’s fee (just make sure the terms of sale are in writing!).
Can I Pass The Fee On To The Buyer?
Who pays the transfer fee is up to the parties involved, but it will essentially form part of the purchase price if you try to get the purchaser to pay it to the franchisor.
It makes more sense for you as the franchisee to pay the fee, but you will have it in mind when establishing a sale price. A realistic sale price, established by assessing competition and perhaps getting an impartial appraisal, will help the sale process go smoothly and hopefully speed it up.
Everything needs to be clear in writing in your Franchise Sale Agreement.
Anything Else?
Note that transferring your franchise happens more easily if you and the franchisor are both cooperating. If you are both honest and open to negotiation, you are more likely to attract a purchaser.
The recent changes to the Code of Conduct mean that there is a requirement for franchisors to disclose the percentage of franchisees involved in dispute resolution in the last financial year. This might impact the saleability of your franchise.
Also, the Code now allows for a cooling off period after a transfer of franchise of either 14 days, or when the control passes to the purchaser. If the new franchisee terminates the franchise within that time, everything may revert and you may be reinstated. You would then get back your transfer fees.
Franchising Resources
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:
- Selling A Franchise
- 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
Key Takeaways
- Read your Franchise Agreement carefully when considering selling your franchise
- Make sure you understand the Franchise Code of Conduct and follow the correct procedure, in the correct time frame
- Keep in mind that the franchisor is protecting his business and that the transfer fee is set to cover his costs
- Try to remain amicable and negotiate the transfer fee with the franchisor
Selling your franchise may seem complicated but just work through the requirements of the Code and your Franchise Agreement, remain open and cooperate with the franchisor and seek professional help.
Sprintlaw is well-equipped to guide through the process. Don’t hesitate to reach out to us on 1800 730 617 or team@sprintlaw.com for an obligation-free chat.
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