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What to Do if My Franchisee Wants to Sell Their Franchise

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It can be disappointing if a franchisee informs you they want to sell their franchise business. However, having clear procedures that outline what steps they must take to complete the sale will make the process easier. In most cases, your franchise agreement will document any processes. As such, it is critical that the franchise agreement correctly articulates the steps you want franchisees to take when selling their franchise. This article will unpack four key steps when a franchisee wants to sell their franchise. 

1. Refer to the Franchise Agreement 

A well-drafted franchise agreement will articulate how a franchise’s sale should occur. As such, you must refer to it where a franchisee wants to sell.

The franchise agreement will include details of the conditions of the sale. Some common conditions you might see in a franchise agreement are your:

  • first right of refusal for the franchisor to buy the business themselves;
  • right to approve the new purchaser of the business; or
  • right to require a purchaser to enter into the current form of the franchise or agreement rather than entering a new agreement. 

Other conditions in the franchise agreement might stipulate that the franchisee must:

  • pay an assignment or transfer fee;
  • pay any outstanding fees owed to the franchisor;
  • upgrade any equipment or locations before selling the franchise;
  • pay your legal costs for the process; or
  • cover the costs of any training for the new franchisee.

A franchisee’s failure to comply with the terms of the agreement may be a breach of contract. 

2. Request Notice in Writing 

If a franchisee wishes to sell their franchise, they should do so in writing. This written notice should outline the franchisee’s plans for selling the business. For example, do they intend to:

  • assign the business to a new third party; or
  • sell the business to a third party who will enter into a new franchise agreement.

Understanding the franchisee’s desires and intentions will ensure you are both on the same page about the sale. Having the request in writing will also ensure a written record of the franchisee’s request. This can be useful to refer to in the instance of future disputes.

You may also choose to assist the franchisee to:

  1. determine the value of the business; or 
  2. source potential buyers.
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3. Remind the Franchisee of Their Obligations

You must tie up any loose ends before ending your relationship with your franchisee. This includes collecting any remaining marketing materials and reminding the former franchisee of their ongoing obligations. 

The deed of release executed during the termination process should explicitly reaffirm the existing obligations of the departing franchisee. Such a reaffirmation will include adherence to restraint of trade clauses and continuing compliance with confidentiality agreements.

4. Prepare the Necessary Documents 

There are various documents that both you and the franchisee will need to prepare to finalise the sale of the franchise. Specific to the franchisee, they are responsible for preparing a sale of business agreement. This agreement is a contract that outlines the key terms of a business transaction. Such a document helps to record both parties’ obligations and rights to prevent future disputes.

Depending on the circumstances, the franchisee may also prepare a lease assignment document. As the franchisor, you will be responsible for most other outstanding documents and ensuring you collect any necessary documentation from the franchisee.

Some of the documents you will be required to prepare are outlined below.

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Deed of Surrender and Release

A deed and surrender of release is a document signed by:

  • the outgoing franchisee;
  • guarantors;
  • the franchisor; and 
  • any related entities (where relevant). 

This document releases the franchisee and any of its guarantors from their obligations under the franchise agreement. It is important to note that this deed will surrender the franchisee from a specified date. The release date specified in the document should align with the settlement date for the business transfer, ensuring a smooth transition of responsibilities and obligations.

New Franchise Grant

Various documents are critical when transferring the rights of a franchise. The nature of these documents depends on the franchisor’s requirements and the method of business sale. However, the following documents are typically required:

Sale of business agreement or asset sale agreementIf the franchise rights are being assigned, a sale of business agreement is crucial. The existing franchisee prepares this document. It should outline the terms of the transfer and explicitly state that the new franchisee assumes all associated obligations and responsibilities for the franchise. Further, written consent from the franchisor is essential to authorise the business transfer.
Deed of assignment or new franchise agreementIn some cases, a new franchise agreement is preferred. In that case, the franchisor will prepare a deed of assignment or an entirely new franchise agreement. This document will formalise the transfer process to ensure the smooth transition of rights to the new franchisee.

Lease Assignment

There are two main ways that leasing arrangements are structured in a franchise agreement, being that:

  1. the franchisee leases directly through a landlord; or
  2. you hold the lease and grant the franchisee a license or sublease to use the premises.

If the franchisee leases directly with the landlord, the landlord must assign the lease to the new owner. On the other hand, if you hold the lease, you will need to have the new franchisee sign the license or sublease to use the premises.

Key Takeaways

Your franchise agreement will outline the correct process to follow when a franchisee wants to sell their franchise. Some common conditions included in a franchise agreement are your:

  • first right of refusal for the franchisor to buy the business themselves;
  • right to approve the new purchaser of the business; and
  • right to require a purchaser to enter into the current form of the franchise; or agreement rather than entering a new agreement. 

You may also stipulate that the franchisee:

  • pay certain fees; and
  • upgrade any equipment or locations before selling the franchise.

If you need assistance understanding your rights when a franchisee wants to sell their business, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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