[This is an article written for the Inside Franchise Business magazine titled: Leaving on your terms - pages 124, 126-127. Certain formatting and emphasis as appearing in the magazine article were that of Inside Franchise Business magazine's]
What are your options and what do you need to be aware of?
- Sell your franchise
- Negotiate a termination with the franchisor
- Walk out
Selling your franchise
Check your franchise agreement to see if there is a requirement that you offer the franchise back to the franchisor first. This is referred to as a “first right of refusal” granted to the franchisor.
Most franchisors have a first right of refusal to purchase your franchise and such procedures vary. Essentially this right involves:
- Offer: you must first obtain an offer from a purchaser (to show that it is a genuine offer) and then submit this offer to the Franchisor OR you must make an offer first to the franchisor;
- Acceptance: the franchisor will then have a period of time within which to elect to purchase your franchise on the terms and conditions set out in the Offer;
- Free to sell: if the franchisor decides not to exercise its rights within the time frame set out in the franchise agreement, then you will be free to sell to a third party.
Practical steps to ensure a smooth transition
The length of time the franchisor has to consider your offer can range from 30 to 120 days.
What you can do: where possible, ensure that your purchaser is locked into a Contract of Sale of Business (“Contract of Sale”) subject to a condition that the franchisor does not exercise its right of first refusal. This way, you will be able to proceed with the sale to your purchaser as soon as the franchisor turns down its right to buy back the franchise.
Note here also that most franchise agreements provide a finite window for you to sell and if you are unable to sell your franchise during this period, you need to go through the process of offering the franchise to the franchisor before you can go to market again.
Once you are cleared to sell to third parties, they still need to be approved by the franchisor, to have satisfactorily completed all training required and are proven to be respectable, responsible, solvent and capable of conducting the franchise.
What you can do: request financial and business references from your purchaser when they sign the Contract of Sale and have them ready for submission to the franchisor as soon as the franchisor declines the buy back offer.
Know your exit obligations
To the franchisor who will look to you for the payment of:
- a transfer fee (this is set out in your franchise agreement and can be expressed as a fixed amount or a percentage of the sale price)
- All monies owing by you under the franchise agreement
- A Performance bond (if applicable) – some franchisors require a certain amount of money to be deposited with them to cover your liabilities which may only be revealed or discovered after the transfer. Such monies will be refunded to you in manners set out in the franchise agreement.
To the landlord and where you occupy under a licence from the franchisor, the franchisor:
- Before changeover, landlords and franchisors (as the case may be) will carry out an inspection of the premises to ensure that they are in a satisfactory condition for the incoming franchisee;
- You may be required to carry out certain refurbishment works and clean the premises.
Ensure that you factor this cost into your exit plan.
Negotiate an early exit with the franchisor
This involves negotiations with the franchisor to try and find a way to reduce your exposure to damages and compensation while keeping the value of the franchise business until a new franchisee comes along. Open negotiations with the franchisor are always encouraged as it is in the interest of both parties that the goodwill of the franchise business is maintained for the next owner.
In some instances, the franchisor may offer to buy you out or assist with the management of the franchise (at a fee) until you find a purchaser.
Walk Out (abandonment)
This is not a recommended exit choice as you will be in breach of the franchise agreement.
The franchisor will have the rights to pursue you for all losses and expenses that it will incur and suffer as a result of your abandonment of the franchise.
With a usual requirement that directors of corporate franchisees provide personal guarantees for the obligation of the franchisee under the franchise agreement, your personal assets will be exposed to satisfy such claims from the franchisor. There is no way of knowing the extent of the exposure to damages this will entail.
Other Exit Considerations
If the lease is in your name:
Check to see if there is a clause in the franchise agreement requiring you to assign the lease to the franchisor upon termination of the franchise agreement.
In any event, before you vacate the premises, you will be required to reinstate the premises to their condition as at the time of commencement of the franchise/lease.
If you are retaining the premises and just getting out of the franchise (no compulsory transfer to franchisor), you will need to de-brand the premises so that they do not resemble the franchised business.
Both de-branding and de-fitting (if you vacate) the premises can be very costly.
You will be required to make good any damage to the premises caused by you in the de-fitting or de-branding.
Note here that some leases and franchise agreements give the landlord or the franchisor (as the case may be) a right to require fitouts to be left at the premises. In this case you may be able to save on defit and reinstatement costs.
Now that you are out, are there ongoing obligations?
Restraint of Trade
You will be restrained for a period of time after the termination of your franchise from operating in competition with the franchisor. This usually means that you cannot be “involved in” a similar business as your previous business, solicit custom from customers of the franchisor or poach staff from the franchisor (to name some common restrictions).
Note here that “involved in” usually extends to your involvement as a director, manager, agent, partner, shareholder or employee of another entity. This effectively means that you cannot work in a similar business for the specified time.
You must continue to keep all confidential information of the franchisor confidential.
Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.