On the market

Manzoor Ishani on the legalities of selling up and moving on, otherwise known as franchise resales

‘Be your own boss - own your own business!' scream various advertisements for the sale of franchises. It is true that one of the principal reasons why people buy franchises is that they get to own their business and, after years of hard work when the time comes to retire or to move on, they are able to sell their business as a going concern and realise again.

Franchisors emphasise this aspect of franchising and it plays a major part in motivating franchisees to grow their business. However, those franchisees who have taken the trouble to seek expert legal advice will have learned the importance of the fine print in most franchise contracts, namely, the conditions which franchisors impose and which franchisees need to satisfy, before they can sell their businesses.

Without question, ethical franchising requires franchisors to permit their franchisees to sell their businesses, subject to certain conditions. These conditions are designed to protect the trade secrets of the franchisor, the integrity of the franchised network and maintain the standard of its franchisees.

However, what is not often clearly understood is that in many cases franchisors reserve the rights of first refusal. There is nothing wrong with this in principle, providing the terms are fair. Experience has shown that most franchisors rely on one of two mechanisms for valuing a franchisee's business if they want to exercise their option to buy. In both cases the franchisee is required to offer his or her business to the franchisor first, before going on to sell to a third party.

Franchisees have no difficulty in selling their businesses to their franchisor or indeed giving the franchisor a right of first refusal, so long as the terms are fair. After all, all they are concerned about is the colour of the buyer's money, not the identity of the buyer.

Franchise agreements provide that if a franchisee wishes to sell, they must notify the franchisor of any offers they have received for their business. The franchisor then has the option of either buying the business by matching the terms of the offer received by the franchisee from a third party or declining to exercise its option. From the franchisor's point of view, this is an ethical approach because for the franchisee it secures the true market value (a willing buyer and a willing seller) of
their business.

An alternative option is for the franchisor to request its franchisee to notify them of their intention to sell the business. If the franchisor is not interested in buying, the franchisee is free to sell to a third party, subject of course to certain conditions. If the franchisor wants to buy, the franchisor and the franchisee get together to agree a price, which is acceptable to both parties. If agreement is reached (and it is in most cases) the deal is done and the business is sold. If they can't agree on a price, the parties arrange for the business to be valued by an independent valuer. Once the value is determined the franchisor must either exercise their option to buy or decline in which case the franchisee is free to sell to a third party, with the added advantage of having an independent valuation enabling them to market the business more effectively.

From the franchisee's point of view the disadvantage with this mechanism is that the independent valuation may be less than a figure the franchisee might have been able to obtain on the open market. The main advantage however, is that the franchisee can effectively sell their business by making one phone call without the hassle of having to deal with numerous prospective buyers

If the franchisor buys the business, the franchisee has the added advantage of not having to worry about whether or not the buyer will be approved by the franchisor, a condition, which is to be found in most franchise agreements.

Although, at the time of buying a franchise, a sale of his business is the last thing on the franchisee's mind. They would be doing themselves a great disservice... ...if they did not read very carefully the provisions in the franchise agreement dealing with the sale of his business. If the franchise agreement is drafted carefully, these provisions should help the franchisee realise their gain and with the minimum of difficulty, thereby confirming one of the principal advantages of franchising.

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