When taking on a franchised business sale as a going concern, one that has been trading, there are a few considerations to keep in mind to ensure your sale is smooth and successful.
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When taking on a franchised business sale as a going concern, one that has been trading,
there are a few considerations to keep in mind to ensure your sale is smooth and successful.
And there is no reason to think that it won’t be. However, some of these lessons have been
learnt from past experience, while others are simply a legal requirement under the
Franchising Code of Conduct. The seller is also bound under their existing Franchise
Agreement so you must be aware of any conditions or requirements placed on the seller at the
time of exit. That is why the seller / franchisee should first contact their franchisor to inform
them of their intention to exit the franchise system. The franchisor will usually be able to
provide documentation in relation to incoming (buyers) and outgoing franchisees. This
documentation will help you to meet the franchisee’s obligations and make certain you and
your client take the right steps towards the completion of sale. Furthermore, it keeps the
franchisor involved in the sale process. The following list, although not exhaustive, covers
some of the major aspects to bear in mind for a franchise resale:-
First Right of Refusal: You will nearly always find this clause in the Franchise Agreement.
This is an obligation on the franchisee to offer the franchise back to the franchisor first. You
must ensure this has been undertaken prior to listing.
Franchise Agreement: Check with the franchisee or franchisor (if necessary) to see that the
existing Franchise Agreement is assignable or whether the franchisor’s intent is to issue the
prospective buyer with a new Franchise Agreement.
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Disclosure Document: Perhaps the most important consideration before entering into any
agreement with the buyer is the Disclosure Document. Under the Franchising Code of
Conduct the prospective franchisee (buyer) must be provided with this document 14 days
before entering into a Franchise Agreement. The Disclosure Document provides the incoming
franchisee with sufficient information to enable them to make an informed decision.
Franchisee Approval: At some point, the franchisor will need to approve the prospective
franchisee to ensure they are capable of running the franchise. They must comply with the
franchisor’s criteria. The franchisor will have an application form that you can forward to
prospective franchisees so they can apply to become approved.
Contract Special Conditions: Special conditions section of the contract may include clauses
Subject to Approval of the Purchaser as a Franchisee
Subject to Transfer or New Franchise Agreement
Subject to Release of Vendor from Current Franchise Agreement
Incoming or Outgoing Costs: Without knowledge and disclosure of these costs (if
applicable), the whole negotiation can easily be derailed. You need to know what is payable,
to whom and when. For example, it in not uncommon for the franchisor to charge the existing
franchisee an Exit Fee and the buyer an Incoming Fee which is usually for initial training.
Furthermore, depending of the vendor’s current level of compliance with the franchise
system, the franchisor may not approve the buyer until such times as either buyer or seller
commit to refurbishment or signage upgrades and POS upgrades if they are behind in these
areas. It pays to ask the franchisor, what needs to be done?
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