How To Ease Your Resale Legals | Stone Group Lawyers

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How a franchisor can ease their resale legals

When a franchisee gives you notice that they wish to sell their franchised business, there are some simple steps to take to ensure that the process is as streamlined as possible. This will in turn ease everyone’s legal costs.

Do your background work

The first step should be doing your own preparation work. Don’t wait until a franchisee gives notice of their intention to sell. Have a process in place that’s ready to go:

  1. Ensure your franchise agreement contains a clear and easy to follow process. If you’re confused about what your franchise agreement says, then chances are that a franchisee may be too.
  2. Take the time to understand the timeframe requirements under the Franchising Code of Conduct (Code).
  3. Put together a standard transfer pack that you can give to franchisees who are intending to sell and have this checked over by your lawyer. This should give a clear step-by-step outline of what’s involved, what you need from the franchisee, who needs to do what and when. This could even be a resource that your franchisees can access alongside your operations manual (for example, if this can be accessed through an online or internal intranet portal).

Put together a process

It’s all well and good to have a structured process, but you should think about how that process will work in practice for your particular franchise system. Keep the following things in mind:

  1. Under the Code, once a franchisee tells you they wish to sell, and gives you all the information you require to decide whether to approve the sale, you then have 42 days to make a decision. If you miss this deadline then the request for transfer will be treated as approved. Therefore, your transfer pack should contain a list of everything you require from a franchisee in order to make such a decision. For example, this may include a copy of the franchisee’s proposed sale contract, contact details, references and financial statements for their buyer, and anything else you would normally ask of a new franchisee.
  2. Generally, a franchise agreement will give a franchisor the ‘right of first refusal’. This means that a franchisee first needs to give you the opportunity to buy the business on the same terms that the franchisee is currently proposing to sell. The franchise agreement will specify a certain time period that you will have to accept this offer. If the offer isn’t accepted in time, then the offer will generally lapse. This timeframe normally starts at the same time as the above 42 day approval period.
  3. Once you’ve conducted your background checks and interviews with the proposed buyer, and you’re satisfied they meet your selection criteria, then you should give approval to the sale conditional on the remaining steps being completed to your satisfaction. Remember that you can withdraw this approval within 14 days of giving it, but you need to have good and justifiable reasons for doing so.
  4. Issue disclosure documents to the buyer. You will then need to wait at least 14 days before the buyer can sign their franchise agreement, and during this time the buyer will need to return a signed receipt for the documents together with the other statements required by the Code.
  5. The buyer won’t have a 7 day cooling-off period from when they sign their franchise agreement. The cooling-off period doesn’t apply to the transfer of an existing franchised business.
  6. Factor in the paperwork that your outgoing franchisee will need to sign and return to you. This is generally a deed to formally terminate/surrender their existing franchise agreement.
  7. Allow time for the buyer to complete your training program. Generally, this needs to be completed before the business purchase from the existing franchisee can officially ‘settle’ (transfer of legal ownership).
  8. If you’re placing conditions on the sale, be clear about these from the outset. For example, if the franchisee’s premises or equipment needs to be brought up to your current standards, or if there’s a debt owed by the outgoing franchisee, don’t wait until the last minute to raise these things.
  9. Finally, know what you need to do from an accounting perspective before the changeover. On or before the day of settlement franchisors will generally collect a transfer/assignment fee, payment for their legal costs, and a clearance of any outstanding franchise fees. If you won’t know a final figure until the morning of settlement, then make this known so everyone can prepare accordingly.

Takeaways

Preparation is key. By putting together clear processes and procedures, you will not only have a streamlined process, but also a lighter bill from your lawyer!

Disclaimer: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.

This article was previously prepared for Inside Franchise Business.

LUKE MCKAVANAGH

Luke is an Associate with Stone Group Lawyers and is a regular contributor to online and print media for Inside Franchise Business. Luke is also a member of the Queensland Law Society Franchise Law Committee.

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