Are you a franchise owner who has decided it is time to sell your franchised business? Before posting that “for sale” sign, there are a lot of preliminary issues to address before you can expect to attract a qualified buyer and successfully navigate to a closing date. Selling a franchise is a little different than selling an independent business. Instead of being a transaction between just a buyer and seller, it is a three-party transaction involving a buyer, seller, AND a franchisor. Accordingly, selling a franchised business requires some extra work.
An early step to prepare selling your franchised business is to carefully review your franchise agreement. Almost every aspect of your relationship with the franchisor is covered by the franchise agreement signed by you and the franchisor, including if, when, and how you can sell or assign your franchise.
What does it mean to assign a franchise agreement?
In this context, an assignment is when a buyer (referred to as the assignee), takes over the rights and responsibilities of the seller (referred to as the assignor) under an existing franchise agreement. Typically, the franchise agreement will allow you to assign the franchised business upon meeting certain conditions. These conditions typically include requirements such as:
- The assignment must be in writing.
- The assignee and terms of assignment must be approved by the franchisor (the franchisor often has a contractual right of first refusal to acquire the business on the same terms as offer by the buyer).
- The assignee must agree to assume all franchisee obligations and responsibilities under the franchise agreement.
- The assignor must remain liable under the franchise agreement post-closing (e.g., if the assignee later breaches the franchise agreement, the franchisor could hold the assignor liable).
- The assignor (or assignee) must pay an assignment fee to the franchisor.
- If the sale is not completed within a certain amount of time, then you have to once again give the franchisor notice of the proposed sale and the first opportunity to buy the business before you sell it to the buyer.
What are other common restrictions found in franchise agreements concerning business transfers?
Beyond the conditions to assignment referenced above, most franchise agreements contain strict limitations on a franchisee’s ability to transfer their business, including:
- Any proposed buyer must meet the franchisor’s then-current qualifications for new franchisees.
- The buyer must sign the franchisor’s then-current form of franchise agreement (rather than just taking over the seller’s existing franchise agreement).
- The seller must cure any defaults under the franchise agreement prior to the sale.
- The seller must execute a general release, basically waiving all claims against the franchisor and its affiliates.
Seek legal and accounting assistance when selling a franchised business.
Selling a franchised business can be a complicated and stressful adventure for a franchise owner. Assistance from an experienced franchise attorney and your accountant can help you: (i) prepare your business for sale, (ii) set realistic expectations, (iii) understand applicable requirements and conditions under your franchise agreement, (iv) prepare the necessary transfer documents; (v) address other potential obstacles to a successful sale (every small business acquisition has its own wrinkles), and (vi) navigate the process to a successful closing.
Please do not hesitate to contact Eric Perkins at [email protected] or (804)205-5162 for assistance with the purchase or sale of a franchised business in Virginia.