Q: What terms will a franchisor typically implement for the resale of a franchise?
While there are no ‘one size fits all’ transfer conditions for franchise agreements, there are a number of terms which are conventional enough to be considered industry standards.
A franchisor will reserve its right to approve of the sale of the franchised business on any or all of the following conditions being satisfied: (a) the franchisor has to approve the purchasing franchisee; (b) the purchasing franchisee must successfully complete the franchisor’s initial training program; (c) the selling franchisee must be operating in compliance with the franchise agreement, including payment of all amounts still owing to the franchisor up until the closing date; (d) the purchasing franchisee may be permitted to assume the selling franchisee’s existing franchise agreement or may instead be required to sign the franchisor’s current agreement, which may include different terms; (e) the selling franchisee may be required to release any legal claims or possible claims it had, has or may have against the franchisor; (f) either the selling franchisee or the purchasing franchisee will be required to update the business or business premises to reflect the franchisor’s current brand standards; (g) the franchisor may hold the right to approve certain deal terms between the selling and purchasing franchisees; (h) the selling franchisee may be required to pay the franchisor a transfer fee.
Q: What should the franchisee understand about why these terms are in place?
When a franchisor approves a franchisee, that person is entrusted with the role of brand ambassador for the franchise system and charged with executing the franchisor’s standard and well-established methods of operations for which it is known and upon which its reputation is founded. Such approval decisions are not made lightly. As a result, franchise agreements will contain numerous conditions that both buyer and seller must meet to the franchisor’s satisfaction before the sale will be approved.
In addition to making sure the purchaser fits the criteria of the franchisee profile, a franchisor wants to check—without getting too involved in the actual transaction between buyer and seller—the purchase price is reasonable under the circumstances.