In most cases selling a franchise business can be cumbersome and stressful at the best of times. The secret to the smooth transfer of a franchise business is to ensure that the franchisee has within ample time met or have a good grasp of their obligations both to the purchaser and franchisor. Obligations to the purchaser can be dealt with on another occasion which leaves us with the franchiseeÕs obligations to the franchisor.

The obligations are generally known as Pre and Post Termination Obligations.

PRE – OBLIGATIONS

A good understanding of the franchise agreement would certainly alleviate any concerns that a franchisee should have in relation to their obligations to the franchisor. The following are pertinent but not exhaustive matters to be considered:

1. Compliance of the franchise provisions prior to requesting the transfer/sale of the franchise business.

2. The provision to offer the franchise business to the franchisor, generally known at the Right of First Refusal, prior to transferring or selling the business to a third party. In most but not all cases the franchisee must offer the franchise business back to the franchisor for an agreed amount, generally an amount which is being offered to the open market. The franchisee must ensure that it meets the strict provisions noted in the franchise agreement during this process.

3. Ensure that the incoming franchisee or purchaser meets the criteria generally set out in the franchise. That is:

(i) the purchaser must be able to meet the financial obligations that the purchaser would have under the franchise agreement; or

(ii) the purchaser must meet a reasonable requirement of the franchise agreement for the transfer of a franchise, including satisfactorily completing the franchisorÕs own current standard training program for franchisees and being otherwise capable of operating the franchise as a franchisee; or

(iii) the purchaser must meet the selection criteria of the franchisor; or

(iv) the disclosure obligations under clause 12 of the Franchising Code of Conduct must be met; and

(v) the proposed purchaser must agree in writing to comply with the obligations of the franchisee under the franchise agreement. The above points are in no way reflective of what must be satisfied for every franchisee and it would be prudent to ensure that the terms noted in the franchise agreement are satisfied.

4. A Deed of Release and Termination or Deed of Surrender must be entered into with the franchisor. In most cases franchisors require this document to be signed to release the franchisor from any claims which may be made against the franchisor whilst the franchisee was conducting the franchise business. It is suggested that legal advice is obtained in respect to such a document.

POST OBLIGATIONS

Once the franchisee sells the business and is no longer a part of the franchise system and notwithstanding that the franchiseeÕs relationship with the franchisor may have come to an end, the franchisee may still have obligations to the franchisor. Some of these obligations include:

1. The obligation to satisfy the post termination provisions of the franchise agreement. These include ensuring that you return all material in accordance with the franchise agreement to the franchisor or purchaser, that is, Operations Manuals, insignia, uniforms, business cards and stationery and the customer database.

2. Satisfying the non-compete covenants of the franchise agreement. This may include the restriction to operate a competing business within a particular territory and during a particular period of time after transferring the franchise business or simply not to contact any customers of the franchise business for a period of time after the franchiseeÕs release from the franchise agreement.

3. Permanently ceasing to use all of the confidential material and any other intellectual property and return to the franchisor or destroy (as directed by the franchisor) any and all such materials or materials featuring the same.

4. Execute all such documents and do all such things as are necessary to transfer to the franchisor or its nominee any and all business names incorporating the Name and any words deceptively similar thereto and any other intellectual property belonging to the franchisor.

Franchisors do all things necessary to protect their brand and the franchise system and the release of a franchisee from its system is a fundamental aspect for the protection of their brand and franchise system. Just as the transaction for signing a franchisee up to operating a franchise business is important the release of the franchisee can be just as important.

To ensure the success of a smooth release the franchisee should be alert to all their obligations in both respects, whether it be those noted above or as stipulated in the franchise agreement.