Franchisees who are interested in cashing out must strictly comply with their franchise agreements both before and during the transfer process. Franchise agreements often include several conditions on transfer, including securing the franchisor’s approval, paying a transfer fee, and complying with the franchisor’s right of first refusal.
If you have built your franchise into a profitable business that you can sell, cashing out will necessarily involve complying with the relevant terms of your franchise agreement. Most franchise agreements include a “Transfer” section that sets out several conditions for the sale to a new franchisee. As a result, engaging an experienced franchisee attorney early in the process is critical to ensuring you can close the transfer successfully.
Of course, from vetting the potential buyer to carefully reviewing the buyer’s financing terms, selling a franchise involves the same steps as selling any other business. Navigating the process successfully requires time, effort, and business savvy, and franchisees who are ready to sell must be careful to avoid mistakes that could jeopardize it.
5 Key Considerations for Selling Your Franchised Outlet
While there are numerous legal, financial, and practical considerations involved in selling a franchised outlet, this article focuses on some of the franchise-specific issues. Here are five examples of key legal considerations for franchisees who are preparing to sell:
1. The Franchisor’s Right to Approve the Purchaser
The “Transfer” section of your franchise agreement almost certainly includes a provision that gives your franchisor the right to approve any purchaser of your franchise. Franchisors need to maintain control of their systems, and purchasers will generally be subject to the same approval requirements as other new franchisees.
Seeking approval for your franchise’s prospective purchaser is a key early step in the process. If your franchisor won’t approve the purchaser, there is no reason to move forward. The approval process can take time (and often won’t be a franchisor’s top priority), so it is important to get started as soon as possible.
2. The Franchisor’s Right of First Refusal
Many franchise agreements also include a provision that gives the franchisor a right of first refusal. If your franchise agreement includes one of these provisions, you will want to address this early in the process as well. If your franchisor intends to substitute itself for any purchaser of your choosing, this is a critical fact that you need to know.
3. Paying the Transfer Fee
In addition to securing franchisor approval (and potentially complying with the franchisor’s right of first refusal), selling a franchised outlet almost invariably involves paying a transfer fee. While buyers and sellers can decide amongst themselves who will bear this cost, it is important to address this early in the process as well, as transfer fees can be substantial.
In most cases, transfer fees are established as specific dollar amounts, such as $20,000 or $30,000. However, some franchisors use different methods. For example, under some franchise agreements, transfer fees are calculated as a percentage of the purchase price. In any case, when preparing for a sale, it is critical to make sure you know how much you have to pay (and factor this into your profitability analysis)—as well as when and how you have to pay it.
4. Remaining in Full Compliance with Your Franchise Agreement
As you work toward finalizing the deal, it will also be important not to overlook your other obligations as a franchisee. Being in full compliance with your franchise agreement is likely a condition for approval of the transfer as well. If you are not currently in full compliance with your franchise agreement, you will need to timely cure any outstanding violation(s) to protect your franchise and your ability to sell.
5. Waiving Your Rights Against Your Franchisor
Finally, when you close the deal, you will most likely be required to waive your rights against your franchisor. While this is a price most franchisees exiting the system are willing to pay, it is important to make an informed decision. If you have a claim against your franchisor that exceeds the value of the sale, then it could be in your best interests to pursue a claim under your franchise agreement’s alternative dispute resolution (ADR) provisions.
FAQs: Selling Your Franchise and Exiting the System
What do I need to do before selling my franchised outlet?
Before you sell your franchise, you must ensure strict compliance with the transfer provisions of your franchise agreement. These include the provisions regarding your franchisor’s right to approve the sale and your obligation to pay a transfer fee, among others. If you do not comply with your franchise agreement’s transfer provisions, not only could this blow up the deal, but it could also put you in default and potentially lead to termination.
Can my franchisor reject a proposed purchaser of my franchise?
If your franchisor has reserved the right to approve any purchaser of your franchise (as is typically the case), then yes, it can reject a proposed purchaser. With this in mind, as noted above, seeking approval from your proposed purchaser will be a key early step in the process.
Do I need to hire a franchisee attorney when selling my franchise?
Working with an experienced franchisee attorney during the transfer process is important for several reasons. Among them, an experienced franchisee attorney will be able to assist with satisfying the transfer conditions in your franchise agreement; and, if any issues arise with your franchisor during the sale process, your attorney will be able to help facilitate a favorable resolution.
Schedule a Call with National Franchisee Attorney Jeffrey M. Goldstein
If you are getting ready to sell your franchise, we invite you to get in touch. To learn more about how national franchisee attorney Jeffrey M. Goldstein can help, give us a call at 202-293-3947 or request a free initial consultation online today.
