Buying or selling a franchise
Food and drink franchising continues to be one of the UK’s biggest growth areas. Kevin Finlayson, Associate with law firm Cripps, incorporating Pemberton Greenish, offers some advice to those wanting to benefit by either buying into or exiting a franchise.
A franchise business works on the basis of a contractual relationship between the franchisor, who owns the brand, and the franchisee, who operates the branch, andh is governed by the franchise agreement. There are therefore some additional considerations with buying and selling a franchise which don’t arise during a sale of a “traditional” business model.
The franchise agreement governs how a sale can take place. As reputation is key to a food franchise, the franchisor will want to retain control over who is in its network meaning the franchisee will almost certainly be required to obtain the franchisor’s consent to the sale. Get this as soon as possible, as the franchisor’s checks on the prospective franchisee may take time. The agreement may also include a right of first refusal in favour of the franchisor, giving the right to the franchisor to buy the franchise, at a price and on conditions set out in the agreement. Alternatively, the franchisor may know of potential buyers, including other franchisees in the network, which, for a fee, it may be willing to introduce to the selling franchisee. It may even be able to assist by providing information on the franchise business to prospective buyers. It is not uncommon for the franchisor to be entitled to a percentage of any price paid by a third party purchaser, as a recognition of these benefits, and its contribution to the value of the franchisee’s business (goodwill).
The sale and purchase documentation will usually be an asset sale but could be a share purchase or an assignment (transfer) of the franchise agreement. It may be that the franchisor has a standard form agreement that needs to be used.
If the sale is back to the franchisor or to another franchisee, then the process may be quicker and easier than a sale to a third party, but the main steps will be the same – starting with heads of terms and/or a confidentiality agreement, then negotiating the sale and purchase agreement while carrying out due diligence and disclosure (the process by which a buyer gets to understand what is in the business). Buying into a food franchise requires particular attention to what is offered for sale in respect of, and the provisions of the franchise agreement relating to, equipment, regulatory matters, licences, lease obligations (whether or not the franchisor is also the landlord), technology, data and employees. Any arrangements with third party delivery companies or online market places will also need checking.
Franchise transfers done properly should benefit buyer, seller and the franchise network as a whole. For more information on buying or selling a franchise or other business, please contact Kevin Finlayson on firstname.lastname@example.org.
This article first appeared in Out of Home magazine in May 2019.