Selling an existing franchise is very different from selling other types of businesses. This is because the franchise agreement between the franchisor and seller-franchisee will impose additional requirements on the seller. These obligations can complicate the sale, delay the transaction and affect the ultimate purchase price of the business. Lusthaus Law provides critical guidance to sellers on complying with the franchise agreement as well as effectively negotiating issues between the seller and buyer.
Review the franchise agreement first
Before a seller can sell its existing franchise, it should review the transfer provisions of its franchise agreement. These provisions explain how and when a sale will be permitted and what buyers and sellers need to do to secure the franchisor’s consent to the sale.
Some agreements give the franchisor the option to exercise the “right of first refusal” and purchase the selling franchisee’s assets directly. When such a provision exists, the seller must contact the franchisor to find out whether it plans to exercise or waive the option.
With respect to a sale to a third-party, a typical franchise agreement requires the franchisor’s consent to the deal and that the parties meet certain conditions set by the franchisor in order to receive that consent.
Sometimes, a seller only needs to provide minimal notice and documentation. Other times, more substantial financial and background information as well as completion of the franchisor’s training program are required.
A more difficult scenario arises when the franchisor has other conditions which necessitate the outlay of significant funds. This includes requiring renovations to the business, payment of outstanding debts to the franchise organization, and payment of transfer fees. Determining who bears the cost for these items may be a factor in negotiations with the buyer.
The added complexity of franchise sales means that sellers should engage qualified franchise counsel to guide them through the process. Lusthaus Law has years of experience advising sellers on all aspects of a transaction.
If you are considering selling your existing franchise, contact Lusthaus Law to learn how we can help you successfully negotiate the sale of your business.