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There will be a point in a franchise’s life cycle where you will want to wind down your operations. This can be by selling the franchise to someone who wants to get into franchising. However, selling your franchise is not a decision to be taken lightly. You should consider a few things before you sell your franchise to get the best out of your franchise and ensure you uphold your legal obligations. Further, most franchise agreements will require that the franchisor has to give final permission before the sale is confirmed. This article will set out:

  • an exit plan;
  • what a restraint of trade clause is;
  • what a first right of refusal is; and
  • how my prospective purchaser is vetted.

Exit Plan

Before you sell your franchise, you should carefully read your franchise agreement. This is because your franchise agreement may contain a predetermined exit plan. This means that there could be a set process for selling your franchise. Usually, an exit plan will contain:

  • the primary goal of selling the franchise;
  • how long until you can sell the franchise;
  • conditions of sale; and
  • who can buy the business.

Make sure you follow the exit plan carefully, as the other party may activate the termination clause if you do not. The termination clause allows the franchisor or franchisee to cancel the agreement if you break a provision in the agreement. If the termination clause is activated, then you may not receive any compensation for your franchise.

Restraint of Trade

If you are thinking about starting another business after you sell your franchise, you should carefully review your franchise agreement. This is because it may contain a restraint of trade clause. A restraint of trade clause restricts you from either:

  • owning a business in the exact location; 
  • owning a business in the same industry; or
  • both.

A restraint of trade clause is usually included in a franchise agreement, so that you cannot take the skills that you have learnt whilst owning the franchise and use them to undermine the franchise through another business. These clauses are common amongst franchise agreements and it is important that you do not break them as you could be liable to court proceedings.

First Right of Refusal

Another clause in the franchise agreement that you should think about is the first right of refusal. This means that your franchisor will have the first right to buy the franchise at the price that you are selling it for. 

For example, if you decide to sell your business to someone for a set price, your franchisor can buy the franchise off you for the price that you negotiated with your prospective buyer. This is important to note, as if you decide to sell to a friend or family member for a discounted price, your franchisor can buy the franchise for that price. 

Franchisors usually include this clause to ensure that the franchisee sells the franchise for market price and so that the franchisor can recoup their franchises. 

Vetting the Buyer

Most franchise agreements will allow for a prospective buyer to be vetted by the franchisor. However, before you refer the buyer to the franchisor, you should vet them yourself. Some key questions you should ask your prospective buyer include:

  • if they can you afford this franchise;
  • what their experience is in business or franchising; and
  • If they are familiar with the industry.

Making sure that your prospective buyer understands how the business works is vital for a smooth transition between owners. You do now want to be chasing up your buyer because they have no been able to put together the money to buy the franchise.

It is essential that you also review your agreement carefully to ensure that you do not have any obligations once you sell the business. For example, you may be asked to train the new owner in certain practice methods that are relevant to the business. The new buyer may also be able to bring their own staff to the business, which means your current staff may be without a job. 

Key Takeaways

When it comes time to wind up your business, it may seem like a simple process. However, when it comes to franchising, it is important that you are aware that there may be a specific process that you must follow. The main barrier is that the franchisor has to approve of the prospective buyer. There could also be clauses in your franchise agreement that affect how the business is sold and your continuing obligations after you sell the business. If you need any legal assistance with selling your business or franchise, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Does the franchisor have to approve of the buyer?

Not in all cases, but most franchise agreements will contain this provision. If you are unsure, speak to your franchisor.

Does a restraint of trade clause apply forever?

No, usually, a restraint of trade clause will have a time limit. The amount of time can depend on the type of business you were in.

Can a franchisor reject my prospective buyer?

Yes, your franchisor can reject your prospective buyer if they feel as if they will not be a good franchisee.

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