What role does the franchisor play in the sale of a franchise business?

When a franchisee is thinking about selling his company, it is advisable to first carefully study the franchise agreement. In many cases, the franchise agreement contains a provision relating to the sale of the company.

The agreement may include that the company must first be offered to, for example, the franchisor or the other franchisees of the organization. Only if they are not interested, or if no agreement is reached, is the franchisee free to offer the company to a third party in such a case.

Apart from the preliminary phase based on the franchise agreement, it should be noted that a third party is interested in taking over the company. Strictly speaking, the sale of the business is a process between the seller (franchisee) and the buyer. However, when a business is sold within a format, there is a third party to be considered in the sale, namely the franchisor. What is the role of the franchisor?

Assuming that the franchisee wants to sell the business under the franchise agreement, the seller will want to get rid of his obligations under the franchise agreement, while the buyer will want to become a franchisee. There are several ways to achieve this in practice. For example, the buyer can take over the current franchise agreement, the franchise agreement will be transferred with the sale. Another possibility is that the franchise agreement with the seller ends by mutual consent, after which the franchisor enters into a new franchise agreement with the buyer. Anyway; the franchisor will have to agree with the purchasing party.

Any withholding of the franchisor’s consent to the proposed transfer should be based on objective and reasonable criteria. If a buyer is not considered capable, and this can also be objectively substantiated, the franchisor is in principle not obliged to enter into a franchise relationship with the buyer. The company cannot then be sold ‘with formula’. The parties should be fully aware of this in a negotiation on the sale of a franchise company and, if necessary, include a reservation in the agreements to be made in order to obtain the franchisor’s consent.

However, the franchisor has no control over the agreements that the buyer and seller make, as long as the franchisor is not affected. In principle, therefore, the franchisor has no role in, for example, determining the price that the parties agree on or, for example, the delivery date, unless the franchisor has an interest to be respected in this regard.
The franchisor does have a responsibility towards the (potential) franchisee. For example, if the purchase price is so high that no return can be expected for the buyer, the franchisor should not enter into a franchise agreement with the buyer. Both the new franchisee and the franchisor benefit from a franchise company with a return that guarantees continuity.

The conclusion: when considering whether to buy or sell a franchise company, the franchisor and its interests should not be lost sight of during the negotiations and these interests may be a condition for reaching an effective agreement and the implementation of that agreement .

Ludwig & Van Dam franchise attorneys, franchise legal advice