Crafting Your Franchise Agreement: Must-Have Clauses

This article focuses on key clauses within franchise agreements and covers the sale of the business clause.

Franchise agreements tend to be weighted slightly in favour of the franchisor, which is necessary to enable the franchisor to have a degree of control over each of its franchisees, thus ensuring the uniformity and reputation of the franchise network.  This is of vital importance to the long-term success of the franchise business and protects the interests of both the franchisor and the franchisee.

Franchise agreements tend to be weighted slightly in favour of the franchisor, which is necessary to enable the franchisor to have the degree of control over each of its franchisees that is necessary to ensure the uniformity and reputation of the franchise network.  This is of vital importance to the long-term success of the franchise business and protects the interests of both the franchisor and the franchisee.

Even before starting their franchise venture, a franchisee should consider their eventual exit strategy.  This will vary for each franchisee depending on their long-term goals and what they want to achieve from buying a franchise.

A franchise agreement should contain a clause allowing a franchisee to sell their franchise.  The clause should set down the procedures and provisions which will apply if a franchisee wishes to sell.  Any sale will be subject in the first instance to obtaining the consent of the franchisor.  Franchisors will take a keen interest in the potential buyer, and a franchisee will not be allowed to sell their franchise to anyone whom the franchisor has not approved.  Whilst franchisors should not unreasonably withhold consent to a resale, their consent will normally be subject to certain conditions being met.  These conditions may include (but are not limited to):

• the character of the buyer;
• the selling franchisee having complied with the terms of the franchise agreement;
• payment of certain fees to the franchisor;
• compliance with the franchisor’s sale procedures;
• franchisor right to buy back the business from the selling franchisee.

Franchisors are permitted to charge various fees on resale, and these fees should be outlined in the franchise agreement.  These will usually include payment to cover the franchisor’s costs in dealing with the application for consent and the initial training and support of the buyer.  It is also common for a franchisor to charge an introductory fee or finder’s fee in the event that the franchisor introduces the buyer.  Fees of this nature are not unusual, but profiteering in addition to these fees will be deemed unfair in line with the British Franchise Association Code of Ethics.  It is important, therefore, that a franchisee establish what these fees will be at the outset and/or agree on a cap on such fees so that the franchisee can account for these at the time of resale.

A franchise resale will be similar to any other business sale, although the franchisor will have some involvement.  It is common for many mature franchisors to have a tried and tested procedure to be followed on resale.  Such procedures may include:

• The purchase monies are to be paid to the franchisor’s solicitor so that any monies owed by the selling franchisee are deducted from the purchase monies and paid to the franchisor before the balance of the purchase price is paid to the selling franchisee.
• The selling franchisee and the buyer will be encouraged to use the franchisor’s precedent sale agreement (to which the franchisor will be a party).  The sale agreement should be drafted so that it is fair to both the selling franchisee and the buyer.  Both the selling franchisee and the buyer (or their appointed solicitors) will be at liberty to amend the agreement, provided the interests of the franchisor remain protected.
• The parties entering into the agreement (exchange of contracts) prior to the initial training of the buyer, and completion taking place following successful completion of the initial training and any handover requirements being fulfilled.
• The franchisor’s legal fees are divided equally between the selling franchisee and the buyer.

Franchise Agreements will often provide the franchisor with the right to exercise an option to purchase the franchise when a franchisee decides they wish to sell.  The option period should be for a reasonable period of time and should not allow a franchisor to buy the business for less than its going concern value.

The overall end result for any franchisee should be to ensure a successful sale of their franchise, and this can be achieved by having an exit plan in place which is adhered to.  Whilst at the outset of the franchising journey, an exit plan may not be something a franchisee considers, its importance should not be ignored.