Sale of a franchise company, a subject to consider in good time

When entering into the franchise agreement, the fact that and under what conditions this, by its nature, temporary agreement will also end again is not always taken into consideration in good time. Both parties have an interest in knowing in advance where they stand.

It is in the franchisor’s interest that the successor franchisee has sufficient quality and can buy the company for a reasonable price, so that it remains profitable for the successor. The departing franchisee wishes to cash in as much as possible on the goodwill he has built up. Conflicting interests may then arise.

What requirements may the franchisor make of a candidate? Can a franchisee refuse applicants? At least not without good motivation. It is not uncommon for the candidate to have a certain level of education and experience, to have a certain amount of capital and to follow training at the franchisor. Sometimes a psychological test is also required. All these conditions, preferably included in the franchise agreement itself, serve the quality of the formula, but may in principle not go so far as to make it impossible for the franchisee to sell his business for a reasonable price.

The franchisor often also stipulates a first right of purchase in the franchise agreement. It may be considered to determine in advance the principles on the basis of which the purchase price must then be determined. A regulation stipulating that the franchisor has the right to take over the company for € 1 in certain situations will not be valid in all cases. Sometimes arbitration is agreed upon to determine the purchase price. It should be borne in mind that arbitration can be a lengthy and costly affair.
The question also arises of whether the franchisee must look for a buyer himself or whether the franchisor can or even must play an intermediary role in this . After all, the franchisor will have quicker access to candidates and also has an interest in a good successor. It is not unusual to stipulate a brokerage fee. In principle, this fee must be in proportion to the costs to be incurred by the franchisor.

Vigilance is required when it comes to price negotiations between departing and aspiring franchisees. The intermediary franchisor quickly finds himself in a dilemma because he acts as a sales intermediary for the seller on the one hand and wants to provide a turnover and result forecast to the prospective franchisee on the other. Price advice to the aspiring franchisee can therefore harm the interests of the departing franchisee and the reverse applies if price advice is not given. As a rule, the franchisor would be wise to make his position clear to both parties and to exercise restraint when it comes to advice on the sale price. This does not alter the fact that the franchisor must outline the consequences of certain (high) single prices by expressing them in the forecasts.

Ludwig & Van Dam franchise attorneys, franchise legal advice