Buying into a franchise can be an efficient business decision, depending on your circumstances. You can rely on someone else’s already proven system, and jumpstart your own business experience. But, you may find you have come to a point where continuing to be a franchisee is not a viable option for you. In most instances, you should be able to sell your rights as a franchisee to someone else and sell the business. However, this depends on your relationship and contract with your franchisor. This article will explain what to know about selling your franchise business and how the franchisor plays into the process.
Check Your Franchising Agreement
Your standard franchise agreement is a long term obligation, ranging from five to ten-year commitments to operating as a franchisee. This is a legally binding contract, and your ability to sell your franchise will depend on what you agreed to when you signed that contract. This document outlines the nature of your contractual relationship with your franchisor.
Typically, your franchising agreement would cover:
- how long the agreement lasts for;
- the territory of your franchise;
- franchising fees;
- your obligations as a franchisee;
- the franchisor’s obligations;
- licencing intellectual property;
- rights of renewal; and
- grounds for termination.
It varies from industry to industry, but most franchises will have a set process in place for franchisees to sell their business if they wish to move on. They would outline this process in your franchise agreement, as well as any restrictions and obligations when it comes time to sell.
Conditions for Selling Your Franchise
Some possible conditions that your franchisor may put in place if you want to sell your franchise business include:
- first right of refusal for the franchisor to buy the business themselves;
- an interview process where the franchisor screens prospective franchisees;
- approval of a buyer by the franchisor;
- requiring that the new franchisee complete the franchise training programme, and you may have to cover those fees;
- an assignment or transfer fee;
- paying any outstanding fees or accounts to the franchisor;
- paying the franchisor’s legal costs for this process;
- trade restraint conditions;
- returning the operations manual and any other franchising materials; and
- a surrender of client lists, details, and other things related to the business’s running.
The Franchisor’s Role
Generally, it is a good idea to notify your franchisor of your intention to sell as early on in the process as possible. Not only may your contract require it, but they could be a source of good advice for the transaction. The franchisor may be able to help you:
- ascertain the value of the business and determine a price;
- help find potential buyers from their list of prospective franchisees; or
- direct you to other franchisees that have sold their business before.
Evaluate What You Are Selling
Depending on what your franchise agreement allows, you will have to be clear about how you plan to sell your business to a buyer. Are you assigning your current franchise agreement to a new third party, or will they enter into an entirely new agreement with your franchisor? A lawyer or broker experienced in franchise sales can help you decide how to structure the sale of the business. Consider what assets or rights you are selling with the business, including:
- equipment that the buyer needs to run the franchise;
- a transfer of lease if they will continue from the same premises, which you will need landlord approval for;
- a licence to use the franchisor’s intellectual property; and
- territories associated with your franchise.
Other Considerations
On top of your obligations as a franchisee when selling your business, make sure to consider other administrative aspects of the process. Have a lawyer look over the sale and purchase agreement for your business, and:
- prepare a transparent business plan to advertise your business to buyers;
- make sure your accounts and records are in order; and
- check what tax obligations you need to be aware of when selling your business.
Key Takeaways
If you decide to sell your franchise, you should notify your franchisor early on in the process. Check your franchising agreement, as there may be restrictions on your ability to sell your franchise. This document will also outline any franchise-specific steps you need to take to sell your business, and your rights when doing so. If you would like more information or help with selling your franchise, contact LegalVision’s New Zealand franchise lawyers on 0800 005 570 or fill out the form on this page.
Frequently Asked Questions
A franchise refers to when a business (the franchisor) gives the right to use its name and business practices to third parties (franchisees) to operate in new markets. If done correctly, it can be an efficient way to expand and grow your business.
Usually, you should be able to sell your franchise as the franchisee. But, there may be some restrictions on this ability. Check your franchise agreement to see if it specifies a process for selling your franchise.
Yes, most franchisors require notification if you want to sell the franchise as the franchisee. Your franchise agreement will outline this. You may need to get your franchisor’s approval of the buyer as well.
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