The purchase of an existing franchise is a popular choice for many entrepreneurs. In addition to getting the name recognition and support of the franchise system and franchisor, the franchisee who is selling the business has put time and money into developing the location. However, the purchase agreement must be carefully negotiated just as any contract. In addition, the buyer must understand the terms of the franchise agreement between the franchisor and seller. The franchise agreement may have a substantial impact on the purchase as well as the subsequent operation of the business. As a result, advice from a qualified attorney is essential. Lusthaus Law has extensive experience counseling franchisors, buyers and sellers to help ensure a successful transition.
Buyers must understand the franchise agreement
One of the most important terms in the existing franchise agreement is the transfer provision. This clause gives the franchisor the right to approve the buyer, explains how and when a sale to a new franchisee will be permitted, and what the parties need to do to secure the franchisor’s consent to the sale.
As an example, the franchisor may ask the buyer to submit financial and other background information in order to confirm the buyer meets the standards established for new franchisees. In addition, the buyer may have to successfully complete the franchisor’s training program. The agreement may also require that renovations be made to the business and various payments be made. Note that who is responsible for these costs is usually a point of negotiation between the buyer and seller.
In addition to getting consent to the sale, the new franchise buyer will likely have to sign a “then-current” form of franchise agreement. Thorough legal review of this agreement is crucial because it can have a significant financial impact on the profitability of the business. For instance, the franchisor may require that the buyer will have to pay a greater ongoing royalty amount than the seller was paying. If so, the buyer will want to consider this increased cost when negotiating the purchase price for the business.
The purchase of an existing franchise is a complex process. The agreement between the buyer and seller, the existing franchise agreement, and the new “then current” form of agreement should be reviewed carefully by an attorney who can advise the buyer on the best way to protect its interests.
You do not need to work through this process alone. Lusthaus Law has a long history of advising clients on the purchase of an existing franchise. Contact us for a consultation.