Option 2: Transfers
For any number of reasons, at some point during the course of the franchise relationship, you may decide it is time to sell your business. While many people assume these reasons are always negative—e.g. an inability to turn a profit or a difficult or overbearing franchisor—they do not have to be. Perhaps you will decide to sell your very successful location to an eager buyer or want to transfer to a son or daughter as part of a family succession plan. You may simply want to retire. No matter what your motivations are, you should seek out a franchisor that will offer support, understanding and co-operation during these often strenuous times.
There are a number of different ways to handle franchise transfers, including the franchisor buying the franchise back as a corporate-owned store. However, when the sale is between you and a new franchisee, there are some common conditions outlined in your franchise agreement that will dictate the franchisor’s approval of the sale.
Conditions on the outgoing franchisee
As the outgoing owner of the franchise, there are certain conditions you will likely have to meet before a sale to a new franchisee is approved. For example, you:
- cannot be in default of your franchise agreement;
- must have settled all of your outstanding accounts with the franchisor and any suppliers or trade creditors; and
- may be required to release the franchisor from all possible claims under the franchise agreement, to the extent permitted by law (the same legislation-protected rights discussed previously are still protected in this circumstance).
Conditions on the incoming franchisee
As with any franchisee signing on for his or her initial term, your replacement will also have to meet certain conditions. The incoming franchisee:
- will have to demonstrate to the franchisor that he or she has the necessary credit standing and business acumen to operate the business;
- cannot be a franchisee with a competing system;
- will have to sign a new franchise agreement, which may have different terms than those contained in your initial agreement; and
- may be required to complete the franchisor’s training program to the franchisor’s satisfaction.
In addition, your franchisor may insist on reviewing the agreement of purchase and sale between you and the buyer in advance. In some rare cases, it may also dictate that it approves the purchase price, in part to ensure it is reasonable and fair to both parties.
You may wish to negotiate on this point. While franchisor approval of the incoming franchisee is acceptable, approval of the transaction itself may be deemed intrusive. That said, if it is involved in the sale process, the franchisor will be more likely to have disclosure obligations to the new franchisee and may even incur other liabilities as a result of its involvement. As such, the franchisor may be willing to remove this condition in order to avoid these additional responsibilities.
Similar to the renewal fee discussed above, a transfer fee may also be charged by the franchisor to cover its internal and administrative costs related to the transfer. Some franchise agreements specify whether the incoming or outgoing franchisee is responsible for the transfer fee. Others are silent on the issue and simply require that it receive the fee from either party as a condition to approval.
Many franchise agreements also include a right of first refusal for the franchisor. This means if someone offers to buy your business, you must make the exact terms of the offer available to the franchisor first, giving them a chance to match it. The franchisor will then decide, within a specified number of days, whether it wants to exercise its option to purchase the business under those same terms. If it elects not to match the purchase offer, you are free to complete the transaction with the buyer (likely on the condition that the sale be under the exact terms presented to the franchisor).