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After owning a franchise for a significant period, you may decide that you want to sell. A franchise is a system in which a business licences its business plan and model to another entity in exchange for periodic franchise fees. It is important to note that selling your franchise may not be the most straightforward job to successfully complete. This article will discuss the common mistakes people make when selling a franchise and how to avoid them. 

Not Knowing Your Franchise Agreement Well Enough

The number one mistake that people make when selling their franchise is not knowing their franchise agreement well enough. The franchise agreement, in conjunction with your franchise manual and disclosure document, may outline how the process of selling your franchise will work. Before you sell your franchise, the proposed purchaser will be vetted by the franchisor. This is to avoid bringing on a person who will not be able to meet the responsibilities of the franchise as a whole. There may already be an exit plan enclosed in your franchise agreement or manual. This may entail that the franchise can only be sold to select people. 

For example, it is common for the franchisor to have the first right of refusal when selling a franchise. This means that the franchisor can buy the franchise on the same terms that you may have with the proposed purchaser. It is important to remember this, as if you decide to sell your franchise to someone at a reduced price, the franchisor can buy the franchise off you at that price.

Misrepresenting Your Finances

Always make sure you are truthful when producing your finances. Under the Franchise Association of New Zealand (FANZ) Code of Practice, you will have to produce a franchise disclosure document that will detail the business’s full financial statements. You can outline your finances to show them in the best light, but they must be correct and up to date.

It is also important to keep ahead of your financial statements and tax returns. Prospective buyers will conduct a thorough due diligence investigation into your business to evaluate the financial performance of your business. Lenders of any purchase of the franchise will also want to see your finances. Unless you are looking for a quick sale, you will need current financials and tax records to keep buyers interest in your franchise.

Not Transferring Contracts 

During the purchasing process, it is crucial that you transfer any contracts to the new buyer. Types of contracts that may need transferring include:

  • lease agreements;
  • equipment hire; and
  • customer contracts.

These contracts need to be transferred for the business to continue with its day to day operation after it has been sold. There are two ways that you can transfer the contracts:

  • through assignment; or
  • novation. 

As novation usually requires the consent of all the parties and is a more timely process, most transfers are done through assignment. Assignment is the process by which the rights and benefits of a contract are transferred to a new party (‘the assignee’). 

Not Engaging With Appropriate Advisors

A number of business owners refuse to engage with appropriate advisors when selling their business. Failing to do this can be disadvantageous as it can lead to sales not following the correct procedures or for a lower price than anticipated. It is important that when you sell your franchise that you enlist the guidance of advisors to avoid these mistakes. Typical advisors that you may want to enlist include a(n): 

  • accountant or tax advisor; 
  • lawyer; and
  • business broker. 

An accountant will consolidate your finances to present your numbers in the best possible light to your prospective purchaser. They will also be able to help with valuing your business and can advise you on any tax obligations you may have. 

A lawyer will be able to draft your purchase and sale agreement so that it does not contain any holes that may come back to bite you down the line. 

A business broker will be able to help you find a prospective buyer for the best price. They will also be able to liaise with your franchisor to make sure that they approve of your purchaser.

Key Takeaways

If you are looking to cash up on your franchise, then make sure you avoid the critical mistakes discussed in this article. Many franchise owners decide that they want to sell and rush the process. Taking your time to find the right buyer is important, not only for you but for the success of the franchise system as a whole. The last thing you want to do is bring on a franchisee who ruins the franchise’s reputation. If you are looking to sell your franchise or need franchising advice, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is there a certain way I have to present my finances?

No, you can present them however you want as long as it is truthful. You will want to display them in a way that presents your business in the best light.

Will my franchisor always have the first right of refusal?

Not necessarily. However, most franchise agreements will have this provision. Make sure to review your franchise agreement before you sell.

Can any contract be transferred?

Yes, any contract can be transferred as long as the contract allows for it. Some contracts may bar certain methods of transfer, so review them carefully. 

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