Are you free to sell your franchise?

02/07/2018 17:00 | Start a business

Are you free to sell your franchise?

While many individuals buy a franchise because they want to manage and grow their own business, there are a significant number of others who sign a franchise agreement with the intention of building the business for eventual resale. A resale can be a fantastic way to generate a relatively quick return on investment, though its not always as smooth sailing as it sounds. As with all aspects of the franchise business model, resales can be complicated by the franchise agreement. While franchisees may be under the illusion that theyre free to sell their franchise, this may not reflect the reality of the situation. Here, we take a look at whether franchisees are free to sell their franchise at their discretion.

Franchise resales

Franchise resales are a popular way to earn a healthy return on your franchise investment. Some entrepreneurial individuals have spent their entire careers and made a considerable amount of money specialising in building up new franchise units for sale further down the line. In fact, a recent survey conducted by the British Franchising Association (bfa) and Natwest revealed that 13% of franchisees buy a franchise specifically to increase their investment with a resale. This constitutes a considerable number of people and suggests that franchise resales are an essential motivation for a significant portion of franchisees. Yet selling a franchise isnt always as easy as it sounds. In some cases, franchisees find themselves facing many challenges.

There are always conditions

Though a franchise resale is usually theoretically possible, its important to remember that there are often conditions you'll have to meet to push ahead with the sale. This can be a major sticking point for franchisees, as many enter into the franchise contract fully intending to sell the franchise at a profit, once its established. If theyre not careful, certain contractual conditions may prevent them from doing so. In such cases, the relationship between the franchisor and franchisee can quickly deteriorate, and problems can escalate. Franchisors arent always as forthcoming about resale conditions as they could be, so franchisees need to take on the responsibility themselves and ensure theyre aware of all contractual stipulations.

What are the typical conditions associated with franchise resales?

In most cases, franchisors attach a relatively similar set of conditions to franchise resales. These include;

  • Payment of any costs incurred by the franchisor this is fairly self-explanatory and involves covering any fees (e.g. legal or financial fees) incurred by the franchisor because of the resale.
  • Retraining staff and preparing the next franchisee some franchisors will stipulate that franchisees must retrain their team to a certain level and introduce the new franchisee to the business, to progress with the resale.
  • Upgrade the business in some cases, the resale will depend on the outgoing franchisee upgrading the company before they leave. This will usually involve meeting certain minimum standards and ensuring all technology and equipment are up to date.
  • Obtaining the franchisor's consent a large number of franchisors will insert a clause in the franchise agreement stipulating that resales can only go ahead with the approval of the franchisor.

Potential problems

Though most of the conditions listed above seem simple enough, they can cause complications and lead to difficulties with the resale. Obtaining the franchisors consent, in particular, can prove problematic. Essentially, this clause leaves all the power in the franchisor's hands, and they can make or break the resale deal. While most franchisors will respect the franchisees desire to move on and wont want to work with a franchisee who isnt fully committed to the business, some wont sanction a resale if they dont perceive it to be in their interest. In such a case, the relationship between franchisor and franchisee can quickly deteriorate, causing further issues and resulting in something of a deadlock.

Ways to ensure resale is possible

The best way to ensure a resale will be possible in the future is to carefully comb through the franchise agreement before you sign it. Check for resale clauses and conditions and talk to your franchisor about the possibilities of a resale. Everything you need to know should be included in the contract, and a franchise lawyer will be able to help you decipher any complex of confusing wording. Its also a good idea to talk to existing franchisees about their experiences. Have they ever attempted to sell their franchise? Do they know of any ex-franchisees that have resold their franchise unit? Are franchise resales common or completely unheard of? Is the franchisor easy to work with and are they honest with their franchisees?

The principal consideration

When considering whether selling a franchise is a possibility or not, the paramount consideration should be the attitude of the franchisor towards resales. The vast majority of the time, franchisors won't block a resale unless it is particularly disadvantageous to their business. However, in some cases, a franchisor will actively try and prevent a franchise resale. If certain conditions have been inserted into the franchise agreement, they're likely to be able to do so. Consequently, franchisees need to do their research, look at the franchisor's history, and talk to existing and ex-franchisees. This should give you some insight into the franchisors likely response to the news of a resale and allow you to make a more informed decision. This is particularly important if you're specifically buying the franchise to build it up and sell it on.

Conclusion
In the vast majority of cases, a franchise resale will go ahead without a hitch. However, there are occasions when a franchise resale will hit upon problems. The best way to avoid these is to research previous resales in the franchise. The franchise contract will offer some insight, as will the franchisor and existing franchisees. Excellent communication with the franchisor is essential to a healthy partnership and will help ensure that most problems are avoided, and the relationship doesnt deteriorate to the point that the resale is held up.

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