Are you a franchisee looking to sell your franchise? It’s an excellent idea, since you’ve worked hard and now you have a capitalization object that has a market value. The good news is that, as the owner of this business, you have the absolute right to sell it.
However, this business is operated under a franchise agreement with a fixed term. And this franchise agreement was concluded in consideration of your qualities. It is said to be concluded intuitu personae.
Intuitu personae contract and approval clause
This has a number of consequences: firstly, a fixed-term contract must be carried through to its end. So, if you were to sell your business without the franchise agreement, the sale of your business would make it impossible to carry the agreement through to the end.
As a result, you would be committing a fault, and you could have to compensate the franchisor for the profit he would have missed out on. For example, royalties not collected up to the normal term of the contract, between the date of transfer of your business without the franchise contract and the agreed term date.
In addition, since it is anintuitu personae clause, as soon as you transfer the franchise contract with your company, the franchisor must contractually approve the person of the transferee and choose him or her to operate the brand, since he or she must also have confidence in the transferee’s qualities.
How do you sell your franchise?
You can exercise this right to sell your franchise by selling your leasehold rights. You have signed a commercial lease for a location with a significant net asset value; you can sell out of business, i.e. without the clientele attached to your goodwill. You then transfer your leasehold rights.
You can also sell the business, but in this case the franchise contract is not included, by law, in the scope of contracts transferred when selling a business.
Only employment contracts, lease contracts and insurance policies for the premises are included in the scope of the business transfer.
This means that the drafter of the deed of sale, whether a drafter or a lawyer, must voluntarily include the assignment of the franchise agreement, subject to the suspensive condition that your business buyer is approved by the franchisor.
The sale may also take the form of a transfer of the franchisee company’s shares, in which case the franchise agreement remains part of the franchisee company’s assets and is not transferred in its own right. However, the approval clause will come into play when the intuitu personae applies not only to the company but also to the seller, i.e. the individual selling the shares. The deed will then be concluded under the suspensive condition of the buyer’s approval.
The right of pre-emption
It should be noted that franchise agreements often include a right of first refusal in favor of the franchisor in the event of the transfer of leasehold rights, goodwill or shares. This right of pre-emption is a promise to sell which is equivalent to a sale.
By signing a franchise agreement, you agree to sell your business to the franchisor if he so wishes. It can therefore take the place of your buyer. Most contracts on the market provide for this substitution to take place on the terms and conditions you have found. He will therefore have to buy on the same terms as those offered to the buyer of your company.
However, some contracts include a pricing formula which, when applied, determines the selling price applicable to your business.
Others leave it to a third party, an expert appointed by the President of the competent court, to set a price that will be binding on both parties. In other words, the sale of your business can only take place subject to the condition precedent that the franchisor’s right of pre-emption has been exercised.
It should also be noted that if the purchaser was aware of this right of pre-emption, and the right of pre-emption has not been exercised, the franchisor could obtain the forced completion of the sale on his behalf. He could therefore judicially replace your buyer in the benefit of the purchase. He might prefer to obtain damages.
If you still have the right to sell your business, you will have to comply with the terms of the franchise agreement relating to approval and pre-emption before you can sell it.
On numerous occasions, I’ve had to exercise franchisor’s rights against franchisees who had failed to respect them when the business was sold.
So make sure you respect them, to avoid the misfortune of a court summons.
