The Franchise Agreement Series
Key Clauses – Sale of Business
The first instalment in a three-part series of articles which focus on some of the key clauses within franchise agreements.
Franchise agreements tend to be weighted slightly in favour of the franchisor. This is necessary as it enables the franchisor to regulate their franchise network. Regulation is necessary to ensure the uniformity and reputation of the franchise network are upheld and remain consistent. This is of vital importance to the long-term success of the franchise business and protects the interests of both the franchisor and the franchisee.
Even before starting their franchise venture a franchisee should be considering their eventual exit strategy. This will vary for each franchisee depending on their long-term goals and what they want to achieve from buying a franchise.
A franchise agreement should contain a clause allowing a franchisee to sell their franchise. The clause should set down the procedures and provisions which will apply if a franchisee wishes to sell. Any sale will be subject in the first instance to obtaining the consent of the franchisor. Franchisors will take a keen interest in the potential buyer and a franchisee will not be allowed to sell their franchise to anyone who the franchisor has not approved. This is standard practice within franchising. Whilst franchisors should not unreasonably withhold consent to a resale, their consent will normally be subject to certain conditions being met.
These conditions may include (but are not limited to):
- The character of the buyer
- The selling franchisee having complied with the terms of the franchise agreement
- Payment of certain fees to the franchisor
- Compliance with the franchisor’s sale procedures
- The franchisors right to buy back the business from the selling franchisee
Franchisors are permitted to charge various fees on the resale of a business and these fees should be outlined in the franchise agreement. Fees may include payment to cover the franchisor’s costs in dealing with the application for consent and the initial training and support of the buyer. It is also common for a franchisor to charge an introductory fee or finder’s fee in the event that the franchisor introduces the buyer. Fees of this nature are not unusual but profiteering in addition to these fees will be deemed unfair in line with the British Franchise Association Code of Ethics. It is important therefore that the franchisee establishes what these fees will be at the outset and/or to agree a cap on such fees so that the franchisee can account for these at the time of resale.
A franchise resale will be similar to any other business sale, but the franchisor will guide the process . It is common for many mature franchisors to have a tried and tested procedure to be followed on resale. Such procedures may include:
- The purchase monies to be paid to the franchisor or their solicitor so that any monies owed by the selling franchisee are deducted from the purchase monies and paid to the franchisor before the balance of the purchase price is paid to the selling franchisee
- The selling franchisee and the buyer will be encouraged to use the franchisor’s precedent sale agreement (to which the franchisor will be a party). The sale agreement should be drafted so that it is fair to both selling franchisee and the buyer. Both the selling franchisee and the buyer (or their appointed solicitors) will be at liberty to amend the agreement provided the interests of the franchisor remain protected
- The parties entering into the agreement (exchange of contracts) prior to the initial training of the buyer and completion taking place following successful completion of the initial training and any handover requirements being fulfilled
- Where applicable the franchisor’s legal fees are divided equally between the selling franchisee and the buyer
Franchise Agreements will often provide the franchisor with the right to exercise an option to purchase the franchise when a franchisee decides they wish to sell. The option period should be for a reasonable period of time and should not allow a franchisor to buy the business for less than its going concern value.
The overall end result for any franchisee should be to ensure a successful sale of their franchise and this can be achieved by having an exit plan in place which is adhered to. Whilst at the outset of the franchising journey an exit plan may not be something a franchisee considers, but its importance should not be ignored.
This article was brought to you by Tracy Williamson, Associate at Ashtons Legal. Ashtons Legal is a full-service law firm which puts the client at the heart of everything it does.
The Ashtons Legal franchise department has over 20 years’ experience in assisting franchise networks across the UK and internationally.