Important Obligations Involved in Selling a Franchise Business

Franchise businesses

Franchise businesses are very popular because they are based upon a proven business model. That’s the reason why more potential buyers are interested in buying a franchise. If you want to sell your franchise business, there are a number of things that you’ll need to take care of. There are some obligations relative to a potential transfer of ownership that you should fulfill. Some of the most important obligations are given below:

First Right of Refusal

In most cases, franchisors have a right of first refusal. They can use this right to purchase your franchise upon those terms and conditions that you have already negotiated with a potential acquirer. The existence of the ‘first right of refusal clause in the franchise agreement means that you’ll have a hard time finding a buyer for the franchise. This is mainly because the franchisor can use this right to stop the transfer of ownership. That’s why, it is important to know if the franchisor has this right, if so if they intend to exercise it.

Franchisor’s Right of Approval

In most cases, franchisors also have the right to approve a successor franchisee with respect to business, financial, experience, and other qualifications. These “rights to approve” can be very dangerous for the current and potential franchisee. In the franchise agreement, it is clearly written that any authorized ownership transfer can terminate the franchise agreement. This simply means that if a franchisor doesn’t deem the transfer of ownership authorized, they can terminate the agreement anytime. In some cases, rights to approval are also accompanied by a number of additional factors, such as an obligation to open the franchise in an additional location, obligation to enlarge the franchise, etc.

Ownership Transfer Fee

According to most franchise agreements, approved successor owners are required to pay ownership transfer fees to the franchisor. In most cases, this fee is less than the fee paid by the original or previous franchisee.

Terms & Conditions of the Franchise Agreement

Franchise agreements are in place for almost forever. Most of them have expiration dates and options for renewal. It is important to have all renewal options negotiated and in place and transferable to the new franchisee.

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Training New Franchisee &Other Requirements

A franchise agreement may require you to train the new franchisee before transferring ownership to them. Likewise, new franchisees must agree to attend and complete franchisor-sponsored training before they get the green signal to assume franchise ownership.

There are many other obligations that current and new franchisees have to fulfill. It is important to go through your franchise agreement in order to find out everything about all obligations that you have to fulfill. Without dealing with these issues in the sale of your franchise business, you’ll find it very difficult to transfer the ownership to the new franchisee. It is true that some franchisors actively resell franchise locations and if your franchisor does it too, you should be aware of it. But, most franchisors are more interested in the sale of new locations than in the sale of an existing location.

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