When it comes time to sell your franchise, understanding the transfer restrictions in your franchise agreement is critical to ensuring as smooth of a transition as possible. Franchise agreements typically include strict conditions on the franchisee’s right to sell, and failure to address these conditions proactively can have potentially-disastrous consequences if your franchisor seeks to impose its will before the transaction closes.
At the Goldstein Law Firm, we have decades of experience representing franchisees in franchise transfers. We can help you address the transfer restrictions in your agreement; and, if necessary, we can represent you in negotiations with your franchisor in order to pursue a successful sale. As discussed below, franchise relationship laws in certain states can override various types of transfer restrictions, and knowing your statutory rights will be critical to minimizing your franchisor’s involvement as much as possible.
Understanding the Transfer Restrictions in Your Franchise Agreement
While all franchise agreements are unique, the transfer restrictions in these agreements tend to be fairly uniform. Some of the more-typical transfer restrictions in franchise agreements include:
- Approval of Terms – The franchisor will reserve the right to approve the financial terms of the deal (to ensure that the buyer will have the financial wherewithal to sustain the business, and pay royalties, following the transfer).
- Buyer Qualification – The buyer of the franchise (the “transferee”) will be required to meet the franchisor’s then-current standards for new franchisees.
- Cure of Defaults – The current franchisee will be required to cure any and all outstanding defaults (such as past-due royalties or failure to maintain system standards) before the franchisor will approve the sale.
- General Release – The current franchisee will be required to sign a release of all claims, known and unknown, against the franchisor.
- Right of First Refusal – The franchisor may reserve the right to buy your franchise on the same terms that you offer to a third-party buyer.
- Then-Current Agreement – The buyer will be required to sign the franchisor’s then-current franchise agreement (rather than assuming the terms of the current franchisee’s existing agreement).
- Transfer Fee – The current franchisee or the buyer will be required to pay a transfer fee to the franchisor.
Generally speaking, it will be prudent to address these issues sooner rather than later. If your franchisor is not going to approve your buyer, then this transfer restriction alone could be a non-starter. Likewise, if you are in default, you need to ensure that your franchisor is not going to issue a notice of termination and deprive you of the ability to benefit from a transfer. If your franchisor is going to exercise its right of first refusal, this is something you need to know before you invest time and money in the transfer process as well.
Limits on Transfer Restrictions in State Franchise Relationship Laws
Importantly, some states have franchise relationship laws that help protect franchisees’ rights to transfer their businesses. For example, California recently updated its law to limit the restrictions that franchisors can impose at the time of transfer. As a result, in addition to understanding the terms of your franchise agreement, it is also critical to make sure that you know – and assert – your rights under the law.
Contact the Goldstein Law Firm about Your Franchise Transfer
If you are seeking to transfer your franchised business, the franchise lawyers at Goldstein Law Group can help guide you through the process. To get started with a complimentary initial consultation, call 202-293-3947 or inquire online today.
