Franchise Resale: The 6 Legal Issues You Must Think About Upfront

Many UK franchises have been around for long enough that their businesses have matured, resulting in a greater number of franchise resale opportunities on the market. If you’re looking to invest in a franchise, you may want to explore the advantages and disadvantages of resale and how it compares to purchasing a new franchise outright. While not all resales are a good business opportunity, many offer spectacular returns on your investment and allow you to get up and running with minimal complications.

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But why do franchisees eventually consider reselling their business? They could be retiring, looking to relocate or have other business interests they would rather concentrate on. It’s also possible that they’re ill, or a loved one needs care, so they can no longer fully commit to the business. They may have concluded it’s not the right business for them or it’s always been their exist strategy to sell up after a certain amount of time for profit. Whatever the reasons, there are some serious legal implications that need to be considered before clearing this hurdle. Therefore, in today’s article, we look at six of the most important issues that franchisors need to keep in mind before kickstarting the resale process.

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The 6 legal issues that franchisors need to consider

1. Be sure to provide warranties

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Once the buyer has done their due diligence and decided that they want to buy the resale, the negotiations can start. They have the right to ask for warranties that confirm the business has been managed properly.

You should provide a document with any issues or risks that currently impact how the business performs. This will include things like litigations, any issues with the lease agreement and debts.

2. Types of sale

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As most franchises in the UK exist in the form of a Private Limited Company (PLC), there are usually two main types of resale to consider:

1. Asset sale – In this type of sale, the seller, the buyer and the franchisor agree on what assets and liabilities exchange hands. This offers a more customised approach, as the buyer can choose what parts of the business they want to acquire. This will include tangible and intangible assets like property leases, supplier contracts and equipment.
2. Share sale – In this type of sale, the business’ shares exchange hands. This means that all aspects of the company, its good parts and bad, are transferred to the owner. This is usually the simpler of the two types of sale, as the buyer takes on the business in its entirety.

Both types of sale have their advantages and disadvantages, and it’s important that you opt for the type of sale that best fits your situation. Between the two types, there are major differences in the way that historical and future tax liabilities are handled, due diligence is carried out and real estate is dealt with.

This means that potential buyers need to do their research and look for professional legal assistance if they’re to understand every facet of the issue.

3. Sales and purchase agreement

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• A sales and purchase agreement or share purchase agreement is also necessary for a resale to take place. While share purchase agreements are relatively simple, sales and purchase agreements can be far more complex.
• These documents detail the key terms of the agreement, including what assets are for sale for what price, tax issues and how previous employment benefits will be handled. The contract documents everything that all the parties have agreed on, and franchisees will want to be completely satisfied with what they are agreeing to before signing on the dotted line.

Who signs the franchise purchase agreement?

Generally, the agreement is signed by all three parties – the buyer, seller and franchisor. This is due to the way in which franchisors usually retain all rights to the name and branding of a business and will demand that they’re party to any resale agreement. Once signed, it means that the buyer and seller have to complete the sale and purchase of the franchise.

Pre-written sales and purchase agreements

In some cases, a franchisor may have a pre-written sales and purchase agreement ready to use. While these aren’t necessarily always to be avoided, they may not offer buyers the required protection and need to be considered carefully before any decision is made. As with all contracts, it’s important that all key terms in the agreement are clearly defined and not open to contestation.

Make sure to put provisions in place for any unforeseen costs

Likewise, buyers should ensure that provisions are made for unforeseen costs that result from the previous owner’s actions. Dispute resolution mechanisms also need to be put in place, just in case anything goes wrong.

Continue to support franchisees after the handover

Finally, it’s important that you make sure you’re willing to continue providing support and services after the handover, as this is something that a buyer will look for when choosing a franchise resale.

4. The franchise agreement

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Remember, the buyer will want to see the franchise agreement, as it’s essential to their business’ success. This needs to outline the obligations that the franchisor and franchisee have, including the support you will provide. This isn’t negotiable with the buyer but it’s important they know exactly what they’re agreeing to. This agreement is also important to outline the conditions of contract termination. This includes everything from what the franchisor is entitled to if the buyer wants to resell, to how often the business plan gets reviewed.

5. Prepare additional documents

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There are numerous additional documents that may be necessary to complete a resale, many of which only apply in specific situations and contexts.

These can include:

• Confidentiality agreements
• Release agreements
• Exclusivity agreements

While not always relevant, these documents are a common component of resales and it’s a good idea to investigate whether they’re necessary in your particular circumstances.

Buyers may also need to request:

• Stock transfer forms
• Board minutes
• List of shareholder resolutions

Each of these documents takes time, effort and money to acquire, so sitting down with a legal advisor who can guide you through the process is highly recommended.

6. Consider getting help from a franchise lawyer

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Throughout this article, we’ve commented on the necessity of professional legal assistance several times. This is because of the extremely complex legal wrangles a resale can entail. While not all resale agreements are incomprehensible to experienced businesspeople, specialist franchise lawyers have the benefit of years of experience.

Consider their cost carefully

When looking to consult a specialist solicitor for legal advice, it’s important to remember that the cost of their service will vary depending on the complexity of the case. This can often make complex transactions prohibitively expensive and buyers need to factor in this expenditure when costing their purchase.

Franchise resales - a valuable opportunity for both parties

While there are many legal issues to consider when it comes to franchise resales, when done correctly from the start, they can drive a lot of value for both parties. Franchisees can benefit from the franchise’s existing customer base, an experienced team, established marketing strategies and lower levels of risk. Whereas, for the franchisor, the new franchisee could be better suited to the business and drive even more profitability to the brand. You can also read read more about how and when you can resell your franchise.