Freedom to sell

If a franchisee wants to sell their business, most franchise contracts will state that consent of the franchisor is required. So what happens if the franchisor does not like the buyer or feels the price they are willing to pay for the business is too high? Manzoor Ishani explains

The franchisor is going to have to show they have reasonable grounds for refusing a buyer. Certainly the point about the business being over-priced will be easier to prove than the point about not liking the buyer, as if the buyer buys at a price that the franchisor considers to be too high, they may have a very difficult time making a success of the business. The test is going to be an objective one and unless the franchisor can reach some agreement with its franchisee, a judge will have to decide, something neither of them wants.

Most franchisees buy a franchise with a dream in mind, which is after a number of years of hard work and dedication they will have built up a business that they will eventually be able to sell. Surveys have shown that around 13 per cent of franchisees buy a franchise to make their investment grow.

Franchisees often forget that any such promise was coupled with certain conditions. Certainly most franchise agreements are very clear about such
terms. However, at the time of buying a franchise, franchisees are concerned about other things such as to secure the franchise and start the business, and having established that, whether they have the right to sell. Most of the conditions one would expect are:

• A requirement that the buyer attend training
• Payment of the franchisor's costs and (sometimes but not invariably) some sort of fee by way of franchise transfer fee
• Obtaining the consent of the franchisor
• The franchisor not exercising any rights of first refusal.

The condition that creates the most difficulty is the one which requires the franchisee to obtain the franchisor's consent.

Franchisees need to be reminded that one of the prime objectives of a franchisor is to ensure that standards are maintained, which means ensuring that all franchisees satisfy the franchisor's criteria with regard to ability, skill, financial strength, character, etc. Just as franchisors are very careful in the selection of their initial franchisee, they are keen to be equally careful in approving an incoming franchisee who buys from an existing one.

Those franchisees, while accepting the underlying reasons for the imposition of such a condition, nevertheless feel uncomfortable about the franchisor retaining total discretion as to who they can sell their business to.

Franchisees usually content themselves with having to rely on the reputation of the franchisor by talking to existing franchisees and doing their homework to see whether or not in the past, the franchisor has exercised such powers as it has retained, reasonably.

It is not all one sided in favour of the franchisors. One has to remember that a franchisor has little to gain by being obstructive and in my experience there has been virtually no abuse of such a condition by a franchisor.
For the buyer the big question is - if they know that the franchisor is dead against the idea why would they want to persist in its proposed purchase?

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