How Free Are You To Sell Your Franchise Business?

Manzoor Ishani (below) discusses the conditions of a resale.

If you are thinking of buying a franchise, you will often be told by your prospective franchisor that you will be able to sell your business when you are ready to retire or move on. In the intervening years, you will be working not only to earn a good living but also to enhance your investment and so all that hard work will not be wasted.

Most franchisors encourage prospective franchisees in this dream.

In commerce as in life, however, things are seldom straightforward. Those who buy on a promise from a franchisor that they will be able to sell often forget that any such promise comes with certain conditions. Certainly, most franchise agreements are very clear about such conditions but at the time of buying a franchise you are likely
to be more concerned about other things, such as securing the franchise and start the business, than about the fine detail of the conditions.

If you are a prospective franchisee, you should reassure yourself by looking closely at those clauses in the franchise contract that deal with your right to sell your business and the conditions attached… and there will be conditions!

You will need to satisfy these conditions if you want to exercise your right to sell. So, what conditions should you expect to see?

  • First, that you are not in breach of contract at the time of the proposed sale 
  • Second, that your franchisor gives their consent and approves of your buyer 
  • Third, that your buyer passes your franchisor’s training course 
  • Fourth, that your buyer signs a franchise contract thereby agreeing to abide by the terms of the franchise in the same way as the other members of the franchise network
  • Depending on the nature of the franchise and the franchisor, there will also be other conditions, namely:
  • Refurbishing of premises (where appropriate)
  • Upgrading the franchised business 
  • Payment of the franchisor’s costs and (sometimes but not invariably) some sort of fee by way of renewal
  • Most seem innocuous enough but the devil, as they say, is in the detail. The condition that creates the most difficulty is the one requiring the franchisee to obtain the franchisor’s consent.
  • Franchisees need to be reminded
that one of the prime objectives of a franchisor is to ensure that standards
are maintained, and this means ensuring that all franchisees satisfy the franchisor’s criteria with regard to ability, skill, financial strength, character, etc. Just as franchisors are very careful in the selection of their initial franchisee, so they are keen to be equally careful in approving an incoming franchisee that buys from an existing one. 

Were they not so careful, they would soon find themselves with a sub-standard network of franchisees, many of whom would have acquired their franchise from an existing franchisee. It makes sense, therefore, that all prospective franchisees, irrespective of how they came to be prospective franchisees, satisfy the franchisor’s criteria and pass the same rigorous tests.

Many franchisees, while accepting the underlying reasons for the imposition of such a condition, nevertheless feel uncomfortable about the franchisor retaining discretion as to whom they
can sell their business. It is a circle that cannot be fully squared and franchisees usually content themselves with having to rely on the reputation of the franchisor by talking to existing franchisees and doing their homework to see whether
or not the franchisor has, in the past, exercised such powers reasonably.

Past conduct is of course no guarantee as to future conduct, but it is now by and large accepted practice that most prospective franchisees rely
on the reputation of a franchisor amongst the current network of franchisees.

It is not all one-sided in favour of the franchisor, however. A franchisor has little to gain by being obstructive and, in my experience, there has been little abuse
of such a condition by a franchisor.

Manzoor Ishani is a franchising consultant at Sherrards Solicitors. To learn more about Sherrards Solicitors please visit out website.

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