Whether you are seeking to sell your franchised outlet or buy an existing franchise as opposed to an independent business, it is important to understand that franchisors often exercise strict control over the transfer process. To a certain extent, this is understandable: Franchisors have a legitimate interest in controlling who operates under their brand and system, and as a result evaluating a transferee should involve much the same process as evaluating a completely new franchise prospect.
However, for any of a variety of reasons, some franchisors take their control over franchise transfers too far. As a result, if you are considering buying or selling an existing franchised outlet, here are some key transfer provisions to keep in mind:
Common Transfer Restrictions in Franchise Agreements
1. Franchisor Consent to Transfer
First, you can be almost certain that the current franchise agreement contains a provision that requires the franchisor’s consent in order to transfer the business. If the current franchisee hired an attorney before purchasing the franchise, he or she may have negotiated a “reasonableness” limitation (i.e. “The franchisor’s consent to transfer cannot be unreasonably withheld”) into the agreement. In addition, state law may require the franchisor to exercise its contractual rights in good faith. However, these are both subjective standards, and obtaining franchisor consent can often be a significant hurdle in the franchise transfer process.
2. Transferee Approval
Along the lines of a consent requirement, many franchise agreements also state that the transferee is subject to franchisor approval. Ideally, this approval right would be limited (i.e. the franchisor must apply the same standards it applies to new prospective franchisees), but that is not always – or even often – the case. You will want to make sure you know what is required for approval, and you will want to know as soon as possible.
3. Cure Outstanding Defaults
Third, franchise agreement transfer provisions will often include a clause requiring the current franchisee to cure any outstanding defaults (i.e. nonpayment of royalties or advertising fund fees) before the franchisor will consent to a transfer. This can present particular challenges when a current franchisee is seeking to sell because the business is struggling. It will be critical to gain a clear understanding of what the franchisor expects in terms of a “cure,” and the transferor and transferee may need to factor the cost to cure the default into the terms of their deal.
4. Sign the Franchisor’s Then-Current Franchise Agreement
Finally, there is a good chance that the existing franchise agreement includes a clause requiring the transferee to sign the franchisor’s “then-current” franchise agreement in connection with the transfer. Depending on how long the current franchisee has been in the system, the franchisor’s new form agreement may include terms (including financial terms and dispute resolution rights) that are drastically different from those in the existing contract.
Are You Considering a Franchise Transfer or Facing an Issue with Transfer Restrictions? Contact the Goldstein Law Firm Today
If you would like to speak with an attorney about your franchise transfer, contact the Goldstein Law Firm. Attorney Jeffrey M. Goldstein has over 30 years of franchise law experience, and he exclusively represents franchisees and dealers. For a free, confidential consultation, call (202) 293-3947 or submit an inquiry online today.