As with any other business owner, you, as a franchisee, may decide to sell your franchised business to profit through the sale or simply to get out of an unsuccessful business venture.

Regardless of the reasons that weigh on the decision to sell your franchise, it is important to understand that selling a franchised business is different from selling other businesses.

Franchise agreements usually impose restrictions on the sale of the franchise. Such restrictions are outlined in the assignment or transfer provisions, which are inserted in the franchise agreement to ensure that the franchisor maintains control over who enters its network. This means that the franchisor may prohibit the sale of the franchised business if certain requirements are not met.

Sale restrictions

The first and most important limitation that you should be aware of is that you must request the franchisor’s consent before signing a sale contract. The franchisor must respond within 42 days and must not unreasonably deny this request.

However, the franchisor’s consent is usually conditional on compliance with requirements set out in the agreement which often include:

• The franchisor choosing not to exercise its right of first refusal
• The franchisor screening and approving the potential purchaser
• You paying the assignment fee and the franchisor’s legal costs with respect to the sale and termination of the franchise agreement
• You not being in breach of the franchise agreement at the time of the sale
• The potential purchaser acquiring occupancy rights (if applicable)  to the premises and any other occupancy rights necessary to operate the franchised business
• The potential buyer and its employees completing the training to the satisfaction of the franchisor before the sale date and being approved by the franchisor
• The potential purchaser paying all costs associated with the negotiation, preparation, execution and stamping (if applicable) of the new franchise agreement.

So the franchisor may not approve the sale of the franchise if the potential buyer does not satisfy its selection criteria. This normally includes the assessment of the buyer’s current and historical financial position, business skills and experience and ability to meet the obligations of any franchisee entering the franchise network. The sale may not go ahead if you have not paid or made arrangements to pay any debts to the franchisor or if you have breached the franchise agreement and have not remedied the breach.

Many franchisors insert a provision in the agreement that requires the franchisee to offer to the franchisor the sale of all assets of the franchised business before offering it to anyone else. So, if a first right of refusal clause is inserted in your franchise agreement, you must first offer the franchised business to the franchisor. In the event that the franchisor is interested in buying the franchise from you, the process of selling your business will be less complicated as you will not have to seek a potential purchaser that satisfies the franchisor’s selection criteria.

Finally, it is important that you carefully review the restraint of trade provisions in the franchise agreement as you will be bound by them after the termination of the agreement. It is fairly common  for franchisees to be restrained from disclosing any confidential information to a third party, using the franchisor’s intellectual property and, most importantly, competing with the franchisor in the market place once their agreement has expired.

It is crucial that you consider such restrictions when deciding what your next business venture will be as they might significantly impact your ability to conduct business in the same area of the franchise.

9 steps to selling your franchise

It is advisable to prepare an action plan setting out what you will need to do before the sale. This may include the following:

1. Fully understand the provisions included in the franchise agreement to deal with the transfer or assignment of the business;
2. Familiarise yourself with the assignment process detailed in the operations manual;
3. Check whether there is a first right of refusal provision in the agreement;
4. Understand the restraint of trade provisions and all obligations that survive the termination of the franchise agreement;
5. Request the franchisor’s consent to the sale of the franchised business;
6. Pay any outstanding amounts owing to the franchisor or any suppliers;
7. Remedy any breaches of the franchise agreement;
8. Make provisions for the payment of the assignment fee and the franchisor’s legal costs in relation to the assignment;
9. Ensure that the potential buyer is aware of the franchisor’s selection criteria and requirements.

The process of selling or assigning a franchised business may appear daunting but is manageable with careful preparation. It is important to familiarise yourself with any transfer restrictions and the franchisor’s requirements and ensure you can meet these before the sale. You should consult your legal and business advisors if you are considering selling your franchise to ensure that a methodical and diligent approach is taken throughout the sale process.