Selling a Franchised Business? Check the Franchise Agreement First!

It is quite common for Franchise Agreements to contain clauses which have a significant effect on the way in which the sale contract should be drafted.  If  a contract for the sale of a Franchised business is signed without first reading the Franchise Agreement and checking any requirements, then it may be difficult to unravel the resulting mess.

There is a lengthy list of things that need to be checked.  If  steps are not taken to ensure compliance, then it is likely that any sale contract will be in conflict with the Franchise Agreement.  This problem can be difficult to resolve because the sale contract may oblige the seller to do one thing and the Franchise Agreement may prohibit the doing of that same thing.

A simple example is a first right of refusal.  If the sale contract is signed then the Franchisee may be obliged to sell to the buyer while at the same time being obliged to sell to the Franchisor.

In order to marry the Franchise Agreement and the Sale Contract it is also necessary to be sensitive to the requirements of the Franchising Code of Conduct.

It is not true however that a Franchisor should submit entirely to the wishes of the Franchisor.  Some of the clauses that the Franchisor will attempt to insert in the sale contract may not favour the parties to that contract and if so should be considered carefully and if necessary  avoided.  The business is owned by the seller and the contract for the sale of the business must ultimately be controlled by the seller.  A Franchisor cannot unreasonably withhold consent to the sale.

If all parties are reasonable and after the necessary checks are completed, the process for the sale can then be agreed with the Franchisor.