Selling your franchise or coming to the end of your term
‘And now, the end is near, and so I face the final curtain…’ Was Frank thinking of franchisees when he sang that song?
The process of exiting a franchise after many years, whether coming to the end of the term or selling along the way can be an anxious and stressful process.
Selling a business is not an easy task and there are many tricks and traps you need to be aware of.
There are contractual obligations under the franchise agreement, rights and obligations under the Franchise Code and many practical steps that need to be taken.
Selling a franchised business is generally far more complex than the sale of a stand-alone business.
The very first rule is plan, plan and plan.
Get legal advice from a franchise specialist and discuss the proposed sale or exit with your accountant well before you engage a broker or go to the market.
So, let’s look at the main issues.
There are several parties involved, which makes the process more complex:
- There is the franchisor and their lawyer.
- The landlord, centre managers, agent and their lawyer.
- The purchaser’s lawyer.
- Banks and finance companies, who may hold security interests or leases over the vendors assets.
That’s a considerable number of people to coordinate and deal with for one transaction and some may be more cooperative than others.
The lawyer’s role for a vendor:
Our role for a franchisee selling their business or exiting a franchise is to advise and support the sale process which includes:
- Advice on the contractual rights and obligations;
- Confirm the process and costs of assignment or transfer of the business;
- ensuring all liabilities are paid, tax issues identified, security deposits released;
- ecuring the release of personal guarantees;
- Coordinate and guide the parties towards a successful outcome- settlement!
The more you plan and seek advice before you make the decision to exit and sell, the more likely it is that you will achieve a successful outcome.
Your lawyer should work hard to be cooperative and active and engage positively with all parties and their lawyers, as everyone is working towards a common goal.
It is, in a sense, a project management and coordination role which does need experience and expertise.
There is method to the process and you do need to know what steps should be taken at the right time believe it or not!
Landlords, purchasers’ lawyers and shopping centre managers and agents can sometimes be difficult or unreasonable as they are not driven by the same motivation as someone selling or exiting a business.
The lawyer’s role is to keep things moving and communicate with the parties involved follow people up, and keep you informed!
Be prepared for a prospective sale to fall through as it can and often does happen. As frustrating and costly as it is, this often occurs due to matters beyond anyone’s control.
The landlord may withhold their consent to transfer of the lease to the buyer, the franchisor may not approve the incoming franchisee, the buyer’s finance may not be approved, or the buyer withdraws following its due diligence or during the 14-day disclosure or cooling off periods.
Be prepared for the settlement date to blowout due to delays in obtaining consents and documents that need to be circulated, approved and signed.
Delays in settlement are not uncommon.
End of term
The Franchise Code amendments, which came into effect on 1 January 2015, altered the rights and obligations between franchisors and franchisees coming up to the end of the franchise term.
This applies when there is no option under the agreement.
There is no obligation under the Code or at law for a franchisor to offer a further term to a franchisee when the franchise term simply comes to an end.
The amendments provide under clause 23 of the Code that if the franchisor does not offer a further term to the franchisee (which can be by extending the existing term or grant of a new term) substantially on the same terms where the franchisor does not offer “genuine compensation” for the franchisee’s goodwill after the franchisee requested the extension the franchisor cannot then enforce the non-compete (restraint of trade provisions) in the agreement against the franchisee. There are some pre-conditions to this – for example, the franchisee cannot be in default.
This is a significant issue for franchisees as it may enable a franchisee at the end of their term to continue operating a similar business, provided you do not infringe the franchisor’s confidential information, nor use their brand.
The golden rules to selling:
Rule 1: Speak to your accountant and lawyer well before you decide to sell. Proper advice and planning will help the process and hopefully get you a better price! Get tax advice before you sign off, and legal advice before you even sign a head of agreement or sale agreement prepared by an agent or broker to ensure all relevant issues have been addressed.
Rule 2: Get advice from experienced franchise lawyers who are members of the Franchising Council of Australia (FCA) – a local property lawyer won’t know all the tricks and traps to guide you through the sale process. FCA members are also governed by members’ standards following best practice guidelines.
Rule 3: Don’t expect help from the franchisor if selling or exiting, particularly if you are in breach or owe them money.
Rule 4: Make sure your house is in order and your financials are up to date; ensure that you have recent management accounts for your agent/broker and the buyer, and that your key agreements, such as your lease, supplier agreements, licenses and permits are current.
Rule 5: Read your franchise agreement (or get your lawyer to) on the obligations when you sell: for example, is there a first right of refusal to the franchisor?
What are the transfer fees to the franchisor, so you can factor them into your sale price? Don’t forget you will have to pay the landlord’s lawyer or agent’s fees to approve the incoming franchisee, which can be costly.
Rule 6: Don’t sell the business to someone you have no confidence in. Why? It may come back to you if they default and if you don’t have confidence in them, is it likely the franchisor or a landlord will approve them?
Rule 7: Avoid offering vendors finance to the buyer or deferred payment terms- this can be a recipe for disaster if the buyer makes a mess of the business.
Rule 8: If possible, don’t accept offers ‘subject to finance’. Why? You may incur substantial legal and accounting costs only to find the buyer didn’t get their loan approved – or they got cold feet and used the loan as an excuse to bail out. Also, the business will be off the market during that period and you could miss out on another buyer who has the funds readily available.
I generally recommend to my clients if there is an offer subject to finance, it is better to suggest the buyer gets their finance approval first, and then we enter into unconditional contracts.
Rule 9: Be patient and part of the process.
Rule 10: Be patient it is a difficult process and there are bumps in the road!
- Plan to sell your business and get your financial house in order before you go to the market.
- Seek early advice from your franchise lawyer and accountant well before you go to the market to establish your sale plan and identify costs.
- Ensure you have your documents in order, up to date and available – including employment records, material contracts, licenses, permits, lease documents and financials – to enable the buyer to undergo their due diligence efficiently.
- Don’t accept the first buyer that comes along! Do your due diligence on the buyer, just as they will do their due diligence on you.
- Be prepared for disappointment – it often takes two or three attempts before you find a buyer that sticks.
- If you don’t think the buyer is suitable to operate the business, it is unlikely that the franchisor or landlord will.
- If possible do not accept an offer subject to finance particularly in the current tight lending market.
- If you do have to offer vendor’s terms what security will you hold and are you prepared to go back into the business if the buyer defaults?
By considering these issues before you sell your franchise or look at exiting you could save yourself considerable time, costs and disappointment.
Robert Toth is a Partner of Marsh & Maher Richmond Bennison Lawyers, with over 35 years’ experience in franchise law and general commercial advice. He is an Accredited Business Law Specialist and Member of the FCA & IFLA with expertise in franchising, licensing and distribution and franchise dispute resolution (acting for both international franchisors and franchisees). Contact Robert and the Franchise team at:
03 9604 9400