So the question you’ll probably want to know is can you, as a franchisee, sell your franchise business? In most cases, yes, but you’ll have to ensure certain pre-requisites are in place. Not to mention, the process can be complex and usually involves a few critical steps.
Check Your Franchise Agreement
The first and most obvious area to look at is the franchise agreement you signed in order to obtain the franchise rights. See what pre-requisites and conditions need to be in place before you are able to execute the sale. One of the most common requirement, among others, is for you to cure all financial and operational defaults of the business before being able to perform the sale.
Almost all franchise agreements will state the requirement of the franchisor’s approval before you can sell your franchise business, and this is rightly so because franchisors want to know who they are awarding the rights to, or rather, re-awarding in this case. Note that the franchisor has the right to veto the sale if they feel the replacement franchisee isn’t suitable or doesn’t possess the necessary capabilities to operate the franchise business.
Some franchise agreements will also provide the franchisor with the “first right of refusal” option to purchase the franchise business, meaning the franchisor has the over-riding option whether to buy your franchise business on the same terms that were offered to your replacement franchisee.
Communicate With Your Landlord
If you’re renting your current place of business, your decision to sell the franchise business will also have implications on your lease agreement. To ensure a smoother transition, inform your landlord of your intention and seek their approval early.
However if the franchisor holds the lease instead and is sub-leasing to you, a new occupacy licence for the replacement franchisee will need to be drafted. In this case, approval from the landlord must also obtained.
Most significantly, there will typically be a non-compete clause in your franchise agreement that prohibits you from certain actions upon expiration or termination. Such restrictions usually specify restraint from operating another similar or competing business or franchise within X amount of following years. Furthermore, you will also be restricted from canvassing customers, suppliers and employees, or using of confidential information and knowledge gained from being a franchisee of the system.
Get Professional Advice
The above only highlights some key points to be aware of when you are looking to sell your franchise business. Even after gaining the appropriate approval, don’t forget that you will still be fully obligated to fulfil your role as a franchisee and carry out the responsibiities until you are able to legally transfer the franchise rights through the sale.
Be sure to consult legal or accounting advice to ensure you are not over-stepping any legal boundaries, and understand the costs involved of pursuing the sale of your franchise business. This will also allow you to understand your rights and be aware of what you can and cannot do, and what you should and should not do.