Realising Your Investment

BY MANZOOR ISHANI

“Be your own boss – run your own business!” it’s the sort of slogan that is projected at those starting out on their franchise research all the time. It is true that one of the principal reasons why people buy franchises is that they get to own their business and, after years of hard work and the time has come to retire or to move on, they are able to sell their business as a going concern and realise a gain.

Franchisors also emphasise this aspect of franchising and it certainly plays a major part in motivating franchisees to growtheir business. Franchisees who take the trouble to seek expert legal advice will have the significance of the small print found in many franchise contracts explained to them; that is, the conditions that franchisors impose and franchisees need to satisfy before they can sell their businesses.

Ethical franchising requires franchisors to permit their franchisees to sell their businesses, albeit subject to certain conditions.

These conditions need not be unduly onerous and are designed to protect the trade secrets of the franchisor, the integrity of the franchised network and maintain the quality of its franchisees.

What is not often clearly understood, however, is that in many cases franchisors reserve for themselves rights of first refusal. There is nothing wrong with this in principle, provided the terms are fair. Experience has shown that most franchisors rely on one of two methods for valuing a franchisee’s business if they want to exercise their option to buy. In both cases, the franchisee is required to offer the business to the franchisor first, before going on to sell to a third party.

One mechanism is that franchise agreements provide that if a franchisee wishes to sell, the franchisee has to notify the franchisor of any offer the franchisee has received for his or her business. The franchisor then has the option of either buying the business by matching the terms of the offer received by the franchisee from a third party or declining to exercise its option. From the franchisor’s point of view, this is an ethical approach because it secures for the franchisee the true market value of his or her business.

An alternative route is for the franchisor to require its franchisee to notify the franchisor of his or her intention to sell his or her business. If the franchisor is not interested in buying, the franchisee is free to sell to a third party, subject of course to certain conditions. If the franchisor wants to buy, the franchisor and the franchisee get together to agree a price that is acceptable to both parties. If agreement is reached (and, in most cases, it is) the deal is done and the business is sold. If they can’t agree on a price, the parties arrange for the business to be valued by an independent valuer. Once the value is determined, the franchisor must either exercise its option to buy or decline, in which case the franchisee is free to sell to a third party with the added advantage of having an independent valuation thereby enabling the franchisee to market the business more effectively.

From the franchisee’s point of view, the disadvantage with this mechanism is that the independent valuation may be less than a figure the franchisee might have been able to obtain on the open market. The main advantage however, is that the franchisee could effectively sell his or her business by making one phone call without the hassle of having to deal with numerous (if he/she is lucky!) prospective buyers. Furthermore, if the franchisor buys thebusiness, the franchisee has the added advantage of not having to worry about whether or not the buyer will be approved by the franchisor (a condition found in most franchise agreements).

At the time of buying a franchise, selling it is the last thing on a prospective franchisee’s mind, but they would be doing themselves a disservice if they didn’t read carefully the provisions relating to the sale of their business in the future. If the franchise agreement is drafted carefully enough, these provisions should help the franchisee to realise his or her gain swiftly and with the minimum of difficulty, thereby confirming one of the principal advantages of franchising.

Manzoor Ishani has specialised in franchising for more than 30 years and is a senior consultant solicitor with Sherrards, a commercial practice advising franchisors and franchisees in the UK and internationally.