The sale of a franchise business involves a number of considerations and a franchisor is not obliged to provide consent.
In addition to what we outline below, there are some additional steps and issues to consider when selling or buying a franchise business. The franchisee’s desire to obtain the best price for the business needs to be balanced with the franchisor’s concern to ensure the purchaser is a suitable franchisee for the franchise network. The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (“the Code”) contains rules which must be followed by both the franchisor and franchisee in connection with the sale of the franchise business. A franchise agreement should set out the process to be followed.
There are a number of considerations the parties should take into account and practical steps that should be followed when contemplating a potential sale of a franchise business or when you might think “I want to buy a franchise business”.
The franchisee will need to request franchisor consent to the transfer of the franchise business. In seeking such consent, the franchisee should provide all information that a franchisor would reasonably need to make an informed decision regarding the sale and the suitability of the incoming franchisee. This is not only a requirement of most franchise agreements but it will ensure that the franchisor can efficiently turnaround the request for consent. Franchisors should have a process for dealing with such requests and should clearly communicate this process and the required information to the franchisee.
The Code does not provide franchisees with an automatic right to transfer the franchise business. However, a franchisor must not withhold consent unreasonably and in considering whether to provide consent, must exercise its powers in accordance with the duty to act in good faith as required by the Code. If a franchisor withholds consent to the transfer, it must advise the franchisee seeking to sell the franchise business in writing, and set out the reasons why the consent has been withheld.
A franchisor protecting its legitimate commercial interests will not breach the duty to act in good faith. The circumstances by which a franchisor may reasonably withhold consent are provided for in the Code, and include but are not limited to, if:
- the proposed franchisee will not be able to meet the financial obligations of the franchise business and/or under the franchise agreement;
- the proposed franchisee does not meet a reasonable requirement of the franchise agreement;
- the proposed franchisee does not meet the selection criteria of the franchisor;
- the proposed franchisee does not agree to comply with the obligations of the exiting franchisee under the agreement;
- the exiting franchisee owes money to the franchisor and has not made provisions to pay those funds;
- the exiting franchisee is in breach of the franchise agreement; or
- the franchisor has not received from the proposed franchisee a written statement that the proposed franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Franchising Code of Conduct.
The franchisor must provide to the proposed franchisee the same information and documents that are required as if entering into a new franchising arrangement. At least 14 days before the proposed franchisee is required to enter into the franchise agreement, the franchisor must provide the following to the proposed franchisee:
- information statement highlighting the key risks and benefits of franchising;
- a copy of the Code;
- a disclosure document; and
- the franchise agreement.
Before entering into the franchise agreement the franchisor must receive from the proposed franchisee a written statement that indicates that the proposed franchisee:
- has received the documents and had an opportunity to read and understand the information provided; and
- received advice about the proposed franchise agreement or franchise business from an independent legal adviser, business adviser or accountant. Or that they have decided not to seek independent advice.
If the franchisor enters into a new franchise agreement with the proposed franchisee, the proposed franchisee has a 7 day “cooling off right” under the Code, whereby the franchisee may decide not to proceed to enter into the franchise agreement. This cooling off period does not apply where the original franchise agreement is transferred to the proposed franchisee.
Typically the exiting franchisee and new franchisee will enter into a separate sale agreement outlining the terms of the sale of the franchise business to the new franchisee. The parties to the sale agreement should ensure that there is a condition in the sale agreement dealing with the requirements of the franchisor to consent to the sale of the business and the “cooling off” period (if applicable). The franchisor may have standard wording for this condition, so the franchisee should check with the franchisor prior to finalising and signing the sale agreement.
Finally, there will need to be a formal deed put in place between the franchisor and franchisee where the parties acknowledge the termination of the franchise relationship.
If you have any questions or think you may need some franchise legal advice about how these franchise options and obligations may apply to you, please do not hesitate to contact a member of our Franchising team by clicking on the following link – Contact Us
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.