If you’re considering buying or selling a franchised business, it’s essential to understand the key considerations to ensure a successful transaction. In this article, we’ll discuss five critical factors to keep in mind when entering into a franchising agreement.
Presenter Sean Lo shared his expertise in this area, with a focus on compliance with the franchising code, specifics of the franchise agreement, licenses, leases, and permits, understanding the franchisee/franchisor relationship, and common disputes.
1. Compliance with the Franchising Code
When buying or selling a franchised business, several transactions occur simultaneously, including the sale itself, the grant of a new franchise, termination from the current franchise, and a new lease or occupancy right. This process involves several parties, including the seller, buyer, franchisor, and landlord.
The franchisor has the basic obligation under the code to provide disclosure, as per Clause 9 of the Code. The transfer is treated as a new franchise agreement under Clause 10, where the franchisor must disclose to the new franchisee. Consent to the transfer is usually sought by the outgoing franchisee.
It’s essential to include the application process in the special conditions of sale to avoid confusion. Clause 25 relates to whether consent is given, and if advice is not provided within 42 days, the franchisor is taken to have given consent, which can be contracted out of in the franchise agreement.
Where a transfer of a franchise agreement applies, Clause 26A will apply. Clause 26A(2) gives the new franchisee the ability to terminate provided that subclause (3) applies too.
2. Specifics of a Franchise Agreement: Key Things to Look Out For
Some franchise agreements contain different means by which the franchised business may be purchased, such as the franchisor requiring that the franchisee has the business valued by a business valuer. Another issue is when the franchisor does not allow the franchisee to advertise without consent.
The franchise agreement may specify clauses that must be included in the contract of sale, or the Operations Manual may include some form of a Sale Pack to be followed when undergoing a sale process. A sale pack generally outlines the processes, costs, and obligations in relation to the sale.
3. Considering Licenses, Leases, and Permits
When it comes to retail leases, it’s crucial to provide an original Lessor Disclosure Statement or an updated copy of this statement. Be aware of the timelines within which the head lessor must provide this statement and the fees that may be charged for its preparation. Redisclosure is required if there is a material change in a lease before the assignee signs the franchise agreement.
4. Understanding the Franchisee/Franchisor Relationship
There is generally no incentive for the franchisor to negotiate terms of the franchise agreement with the incoming franchisee due to the bargaining power the franchisor holds.
5. Common Franchising Disputes in Sale and Purchase Situations
Some common disputes include incoming franchisees wishing to purchase a corporate store or a greenfield site rather than the business, timeframes, prior representations, and non-approval of incoming franchisees.
In conclusion, buying or selling a franchised business involves many transactions and parties. It’s essential to understand the specifics of the franchise agreement, comply with the franchising code, consider licenses, leases, and permits, understand the franchisee/franchisor relationship, and be aware of common franchising disputes in sale and purchase situations. By keeping these key considerations in mind, you can ensure a smooth transaction and protect your interests.