When it comes to selling a franchise system there are four simple legal steps to take that will help optimise the value.

Successful franchise systems are hot property, with an increasing number of buyers keen to take advantage of the long-term royalty streams and other opportunities a well run franchise system offers.

The sale of a franchise system involves the sale of a wide variety of assets, rights and responsibilities, and a prospective purchaser will usually undertake a detailed due diligence exercise to examine these in detail.  Good preparation by a franchisor can help ensure the buyer’s due diligence and the overall sale process both run as smoothly as possible. 

Here are some key legal issues for a franchisor to think about to prepare for the sale of the franchise system, and some pro-active steps that can help achieve the best purchase price.

1. What kind of sale?

Franchise systems can be sold in different ways.  If the franchisor is a company or a unit trust, the sale can be made by a sale of the shares in the company or the units in the unit trust.  Alternatively, the assets of the franchisor can be sold.

There can be significant differences in the amount of income tax and stamp duty payable depending on how the sale is structured.  It pays for a franchisor to get good tax advice up front, so the sale can be structured in the most tax-effective way.  This can mean a big difference in the amount that the franchisor’s owners actually end up with in their pocket at the end of the day.

2. Check the franchise agreements and leases

Ensuring the franchisor has the legal right to transfer the franchise agreements to the purchaser is absolutely critical for a sale of the franchisor assets.

Most franchise agreements contain clauses allowing the franchisor to transfer the franchise agreements at any time.  However, in some cases the franchisor may not be able to assign franchise agreements to another franchisor without the consent of franchisees.  Care needs to be taken to check the franchise agreements to make sure the franchisor has the right to transfer the franchise agreements and to note any limitations or restrictions that may apply.  Any issues can then be dealt with in advance, so they don’t cause problems later on.

The same issues apply to any premises leases the franchisor holds, which may include head leases of franchisee sites or a lease of the franchisor’s head office.  Usually the franchisor will be legally obliged to obtain the landlords’ consent to assign the leases to a purchaser or to a change in control of the franchisor, so it is important for the franchisor to have a good understanding of the requirements of each lease.

3. Sort out disputes or potential claims

Ongoing litigation and disputes, threatened legal claims or unrest in the franchise network can put potential buyers off, and undermine the value and sale price of the franchise system.

In preparation for a sale, franchisors should do all they can to settle litigation, resolve disputes, eliminate potential claims and sort out any other lingering issues in the network.

Where possible, the agreed resolution of any dispute or claim should be documented and contain a clause releasing the franchisor from any further liability in relation to that matter.  Aside from reassuring a buyer that the problem has been dealt with, this also helps reduce the selling franchisor’s ongoing exposure if the franchisor provides the purchaser with an indemnity against such claims in the sale agreement.

4. Get organised

A selling franchisor should have the network ready for sale, and this may mean taking the time to tidy up some loose ends and get organised.

Copies of all franchise documents, lease documents, supplier agreements and any other key documents should be located, catalogued and organised, ready for the purchaser’s due diligence.

Missing documents should be chased up, improperly or unexecuted documents should be correctly executed, outstanding money from franchisees should be actively chased up and operations manuals and other procedures should be brought up to date.

Checks should be made to ensure trade marks, business and company names, telephone numbers and facsimile numbers, internet addresses, e-mail addresses and so on are listed in the franchisor’s asset register, properly registered with the relevant authority or provider, and current.  Any outstanding registrations or renewals, and any infringements, should be dealt with.

The franchisor should check to make sure that it can show it has complied with the Franchising Code of Conduct when signing up its franchisees. For example, does the franchisor have acknowledgement that each franchisee has received the disclosure document and provided the section 11 certificates as required by the Code.

Spending time up front getting the franchise network ready for sale and addressing these key legal issues can save a lot of time in the long run, while helping the franchisor achieve the best purchase price and minimise the risk of problems and delays in the sale process.

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