Can a franchisee sell their business at any time?

Author: Shelley Nadler

answered by Shelley Nadler

Legal director at Bird & Bird

While every franchise agreement is different, in theory a franchisee can sell its business at any time. That said, if a franchisee tries to sell it near to the end of the term of the franchise agreement, the value of the business can diminish proportionately, particularly where it only has a year or two left to run. It’s important to check the sale of the business clause in the agreement because it may or may not allow for a full new term to be granted to a purchaser of the franchise. Some sale of business clauses only allow a purchaser to acquire the balance of the term of the existing agreement. If the sale of business clause provides that the purchaser enters in the franchisor’s then current form of franchise agreement and this has a right of renewal, the purchaser will obtain the balance of the existing term plus the right of renewal. This may be long enough to satisfy the purchaser, but if it isn’t the franchisee/purchaser would have to negotiate with the franchisor to see if it is willing to grant a new franchise agreement with a longer term. If a franchisee wishes to sell their business, the franchise agreement will usually provide that they can sell it to a third party, subject to that purchaser meeting the franchisor’s standards. The new franchisee will have to be acceptable to the franchisor as if they had applied directly to the franchisor. It is usual for the franchisor to demand the same qualifications and standards for acceptance of a purchaser of the franchisee’s business as being applied to direct applicants. The franchise agreement will usually lay down an approval process that must be followed by the potential vendor. This usually includes providing the franchisor with the right to purchase the business from the franchisee on the same terms as any arm’s length third party purchaser.

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