Selling a franchised business - points for consideration

The sale of a franchise business is even less straightforward than the sale of a normal business as a going concern. Franchise lawyer Jonathan Chadd examines the aspects that need to be taken into account

Every franchise owner (like any prudent businessman) should have a proposed exit strategy from their business. This may be a sale to a third party purchaser or a sale back to the franchisor or the individual franchise owner's retirement from the business and his succession by a member of his family. Such a strategy may change over time but any sensible business owner will be looking at some point to realise a return on all the money and hard work they have invested in the business.

The key difference for franchise owners in this regard is that their rights to sell or pass on the business to a beneficiary are determined by the terms of their franchise agreement. It is, therefore, vital for any franchise owner before taking up a franchise to examine carefully those terms in the franchise agreement. The British Franchise Association's Code of Ethics requires franchisors to ensure that their agreements permit the sale of franchised businesses by franchise owners and also permit the handing-on of the business to a beneficiary in the event of the franchise owner's death or incapacity.

Franchisors will want to ensure that anyone taking on the business is suitable as a franchise owner, has the necessary financial resources and has been trained in the operation of the Business System. Most franchise agreements restrict the franchise owner from assigning their rights in the franchise agreement to a purchaser but permit the sale of the business to a purchaser approved by the franchisor on the basis that the franchisor will then grant that purchaser a new franchise agreement either for the remainder of the term of the existing agreement or for a full (typically five year) term.

The franchisor will normally reserve to itself in the agreement an option to acquire the franchised business for itself or its nominee either at market value or on the same terms as those offered by any proposed purchaser. This provides the franchisor with an important degree of control over the process and enables it to acquire for value franchised outlets that it may wish to operate itself.

Most franchise agreements will provide that, if the franchisor has introduced the purchaser to the franchise owner or the purchaser is another franchise owner, the franchisor is entitled to charge the franchise owner a sum calculated as a percentage of the purchase price (usually between two per cent and seven per cent) by way of its commission for introducing the purchaser. This motivates the franchisor to promote the sale of the business and assist in securing a suitable buyer.

The franchise owner will almost certainly be required to pay a transfer fee to cover the franchisor's legal and administrative costs in dealing with the application for approval of the proposed purchaser, in the issuing of the new franchise agreement and in the training of the new franchise owner. Franchise owners should check carefully whether their agreements require payment by them, as the vendor, of all of such costs or whether, for example, the training costs will be paid by the purchaser. Either way such payment is likely to affect the price.

A well organised franchisor will have a clear set of procedures for sale set out in its Operations Manual and an obligation for the franchisor and its purchaser to use, as the basis for the Sale and Purchase Agreement, a document prepared by the franchisor's solicitors which will usually join the franchisor as a party to the transaction for the limited purposes of accepting the surrender of the existing franchise agreement and granting the new one to the purchaser. It is common for the franchisor to maintain a level of supervision of the transaction generally to ensure that the purchaser acquires all the assets it will need to operate the business successfully.

The new franchise agreement granted to the purchaser will need to reflect the fact that the purchaser is acquiring an existing franchised business. It is unlikely that the full amount of the initial fee will be payable under that agreement and the franchisor will not be obliged to undertake all the obligations incumbent upon it when granting a new franchise to a new franchise owner. The precise terms on which the new franchise will be granted are important for the selling franchise owner since they will impact upon the price to be paid for the business by the purchaser.

The franchise owner selling a franchised business will be subject to post termination restrictions under the terms of the franchise agreement. These will normally prohibit them from engaging in any business which competes with the franchised business for a period of 12 months following the sale. Such a period of restriction is generally permitted under the EU Block Exemption but the period can be extended as between the franchise owner who is selling his business and the purchaser. The purchaser can impose a longer term restriction to prevent the franchise owner competing within the territory of the franchise.

An experienced franchise solicitor will be able to advise franchise owners both at the time they are taking up the franchise and when they wish to sell it as to the steps to be taken and the enforceability of any restrictions imposed by the agreement.

The important point for franchise owners to take on board is that they need to understand the terms in the franchise agreement which affect their subsequent sale of the business before they sign the franchise agreement. If they obtain proper advice at that time they will avoid any unpleasant surprises when they come to sell the business at a later date.