How to Purchase an Existing Franchised Business
How to Purchase an Existing Franchised Business
For a business buyer, the franchise space presents several advantages over starting your own business or buying another type of business. A franchised business not only possesses established clientele, but also prominent brand recognition.
When starting out on your journey with buying a franchise, it can be comforting to know that you do not have to start from scratch as someone has already done the groundwork to build the business up to where it is today.
The choice of buying an existing franchised business as opposed to establishing a new franchise location is entirely up to you. While buying an existing franchised business has many benefits, you will need to consider if the cost of doing so is suitable for you. In addition to paying the franchisor for the right to operate the franchise, you will also be paying the existing franchisee for the hard work they have put into growing the franchised business.
The sale process can be daunting and unfamiliar – this article sets out the essential aspects of purchasing an existing franchised business, in particular:
- the sale and transfer process;
- the sale of business contract;
- the franchise agreement; and
- the lease.
The Sale and Transfer Process
Once you are ready to take the first step of buying an existing franchised business, it is important to understand the sales process to ensure a successful business purchase.
There are five common steps:
- Making an offer;
- Negotiating the key terms of the sale;
- Reviewing, negotiating and signing the sale of business contract;
- Obtaining franchisor consent and entering into the franchise agreement; and
- Finalising your purchase of the business.
Whenever a franchisee wishes to sell their business, they must comply with the terms of their existing franchise agreement. As the franchisor is the overarching owner of the franchise network, they must provide their consent to the sale as well as to you becoming a franchisee. This means that there are extra steps that need to be taken compared to the sale of an independent business.
The Franchising Code of Conduct (the Code) sets out the transfer process that must be followed. The standard process has six steps:
- The franchisee first offers the business for sale to the franchisor.
- The franchisor must notify the franchisee within 21 days if they wish to accept the offer (this timeframe may vary).
- If the franchisor does not wish to purchase the franchise, the franchisee must seek their consent to transfer it to a particular buyer.
- Based on the requirements of the franchisor, the franchisor may either withhold or provide consent. (If consent is withheld, the sale cannot go ahead. Consent cannot be unreasonably withheld).
- If the franchisor provides consent, the buyer and the franchisee must then satisfy the conditions of that consent (for example, your experience, financial position and suitability to join the franchise network) as well as prepare a sale of business contract.
- The buyer enters into a new franchise agreement with the franchisor.
The Sale of Business Contract
The sale of business contract sets out the terms of the sale and ensures that both parties are protected in the transaction. The sale of business contract is usually prepared by the franchisee’s lawyers. However, the franchisor may require that their own lawyers prepare the contract or for particular special conditions to be included.
As a buyer, it is important to engage a lawyer who specialises in the sale or purchase of franchised businesses. In particular, they will ensure that the contract covers terms which are specific to the sale of a franchised business.
- the contract should be subject to the franchisor providing consent and both the existing franchisee and the buyer meeting the franchisor’s conditions for consent (e.g. paying any fees or attending training);
- settlement being conditional on you and the franchisor executing your new franchise agreement; and
- the landlord of the premises providing consent for you to occupy the premises of the business.
The Franchise Agreement
In a sale of an existing franchised business, the franchise agreement sets out your rights and obligations in managing the franchised business after settlement of the sale.
It is more common for the franchisor to require a buyer to enter into a new franchise agreement rather than to transfer the current franchisee’s franchise agreement. Among other things, your franchise agreement will set out the payments you need to make to the franchisor, how you need to fit out and occupy the premises and any mechanisms for resolving disputes.
The Code sets out the process for how a franchisor must provide a new franchisee with a franchise agreement and other important documents including an information statement, the disclosure document and a copy of the Code.
The franchisor must provide these documents at least 14 days before you sign the franchise agreement or make any non-refundable payments. This disclosure period should be factored into any proposed settlement date. Franchise agreements will often require you to get a lawyer to sign a legal advice certificate. A franchise lawyer can also advise you on your rights and obligations as well as request amendments.
If the existing franchised business operates out of a premises (e.g. a shopfront), then there will be an additional party involved in the sale — the landlord.
With a franchised business, the buyer would either enter into a:
- licence to occupy with the franchisor (who is the tenant); or
- deed of assignment to have the lease transferred from the current franchisee.
It is common with a franchised business for the franchisor to be the tenant under the lease as it allows them to maintain some control over the premises. It can often be easier to obtain the use of a premises when there is a licence to occupy instead of an assignment of the lease itself.
Whether the lease is being assigned to you or you are entering into a licence to occupy, you should understand your rights and obligations under the lease. As the licence to occupy will require you to be bound by the terms of the lease itself, review both documents to ensure that you understand the terms.
If the lease itself is being transferred, then you will need to enter into a deed of assignment with the landlord. If the lease is a retail lease, there are also additional obligations each party must meet depending on the state or territory within which the premises are located. The requirements for assigning a lease can be stringent and cumbersome. Getting the process underway early is advisable to avoid any delays closer to settlement.
There are many moving parts to purchasing an existing franchised business. As the buyer, you need to be confident that the sale of business agreement, the franchise agreement and any applicable lease contain terms and conditions that are reasonable and fair. Getting the assistance of a franchise lawyer experienced in managing the entire process will provide you with peace of mind in knowing that your interests are being looked after throughout the transaction.
Helen Kay is a Practice Leader at LegalVision with extensive experience working within top tier firms in the UK and Western Australia.
Bianca Reynolds is a lawyer, who works across LegalVision’s Sale of Business and Commercial teams. Both Helen and Bianca advise commercial clients across many industry sectors in relation to commercial leasing, business sales, franchises and commercial contracts.
LegalVision is a market disruptor in the commercial legal services industry. Their innovative business model and custom-built technology assist their lawyers to provide a faster, better quality and more cost-effective client experience. LegalVision is a leader in delivering legal services in Australia and has assisted more than 50,000 businesses. The firm was awarded NewLaw Firm of the Year at the 2017 Australian Law Awards.
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