HOW DOES IT WORK?
Before you buy, understand what is involved in selling on your franchise.
The finer points of selling a franchise.
When you buy an independent business, it is yours to sell on, when and how you see fit. However there are some significant differences in the transactions around buying and selling a franchise.
It might seem crazy to be thinking so far ahead when you are only just considering your buying options. But as a potential franchisee, how you get out of your business is important.
The number one difference between selling an independent business and selling a franchise is that the franchisor commonly has to approve an incoming franchisee.
That makes sense. When you buy your franchise business approval is an accepted part of the process - whether it’s a brand new or greenfield site, or you are taking over an established business. So flip this and put yourself in the place of the franchisor.
Your fellow franchisees rely on the franchisor to maintain the good name of the franchise, and to ensure new franchisees will pay their way and have the best chance of success. Poor trading practices and failing businesses are bad news for the whole group.
The good news is that there are rules in place to guide the process. These start with the franchise agreement, which is particular to each brand, and will outline any conditions and the particular process required for a sale.
THE FRANCHISING CODE OF CONDUCT
There is a governing regulation for the Australian franchising sector too. This is the Franchising Code of Conduct and it outlines the circumstances in which a franchisor can reject a potential buyer.
The sale of a franchise is described in the Code as the transfer of franchise agreement. The Code states “A franchisor must not unreasonably withhold consent to the transfer of a franchise agreement.”
However, there are circumstances in which the franchisor can refuse consent.
For instance if the buyer:
• is unlikely to meet the financial obligations
of the franchise agreement
• does not meet a ‘reasonable requirement’ of
the franchise agreement for the transfer
• doesn’t meet the franchisor’s selection criteria
• won’t agree in writing to comply to the franchise agreement • hasn’t provided a written statement that he or she has had a ‘reasonable opportunity’ to understand both the Code of Conduct, and the particular franchise disclosure document.
There are also commitments the franchisee has to fulfil for the franchisor to allow the sale. The franchisor may reject the transfer if the franchisee:
• has not paid, or arranged to pay,
outstanding debts to the franchisor
• has not remedied a breach of the franchise agremeent According to the Code, there may be other unlisted reasonable circumstances in which the franchisor can withhold consent.
THE FRANCHISOR’S RESPONSIBILITIES
The franchisor will be assumed to have consented to the sale if it doesn’t refuse in writing within 42 days of the request to sell. If the franchisor asks for further information, it has the same period to approve or reject the buyer.
If the franchisee doesn’t get any written notification, the Code assumes consent is given - and it cannot be withdrawn.
However, consent can be revoked if the franchisor has followed the correct process, and written to the franchisee within 14 days explaining the franchisor’s change of mind.
Remember, a franchisor must be provided with all the relevant information so it can make an informed decision.
RIGHT OF REFUSAL
Some franchise agreements give the franchisor the first right of refusal. This means the franchisor can buy the business on the same terms and conditions being offered to your buyer. If this is the case, the sale to a buyer can only go ahead if the franchisor does not take up this offer.
IT’S NOT JUST THE FRANCHISE AGREEMENT
There are likely to be other rules that have an impact on the sale process. For instance, if the franchise operates from leased premises you will need to obtain the landlord’s consent to transfer or re-sign the lease.
Any financed equipment deal needs to be paid out or transferred to the incoming franchisee.
Usually a franchisor requires the buyer to sign a new agreement for what’s left of the franchise term.
Remember the seven-day cooling off period does not apply to the sale of an existing business.
It would be wise to get lawyers involved in the documentation and sales process, just as you will with your franchise purchase.