Franchisors restrict transfers of their Franchisees in order to maintain control over the persons who operate them. Such restrictions should apply to the franchise agreement, ownership of Franchisee and the assets of the Franchisee’s business.
Typically, the Franchisor reserves the right to approve the transferee and the terms of transfer. The right to approve the terms of transfer is important to ensure that the buyer of the Franchisee’s business does not substantially overpay for it, or accept burdensome payment terms, which could jeopardize his ability to operate the business in compliance with the terms of the franchise. Some franchise agreements merely provide that the Franchisor will not unreasonably withhold approval of a transfer.
Others specify in considerable details the criteria for approval relating to the proposed transferee and the terms of the transfer. It is common for Franchisors to reserve a right of first refusal to buy the Franchisee’s business on the same terms as are offered by a bona fide purchaser. Franchisors exercise this right to acquire franchised businesses as company-owned outlets and, occasionally, in lieu of denying approval of a proposed transfer when the Franchisor is unsure that it has sufficient grounds to disapprove a prospective transferee.
Franchises are granted for a definite term, usually between 5 to 10 years for local franchises and up to 99 years for master franchises and therefore will expire at the end of such term.
Franchise agreement should deal with this significant element of the franchise relationship, providing for the preconditions for the grant of a successor and the terms on which it will be granted. If a franchise is not renewed, the restrictions on the business activities of the Franchisee and its owners and members of their immediate families are an issue.
Some franchise agreements provide for a post-expiration covenant not to compete. If the Franchisee is prohibited from operating the same type of business in the same market under a different trademark subsequent to expiration he will lose whatever “going concern” value his business has apart from value of the expired franchise. Such value may consist of location value and the personal goodwill of the Franchisee in his market.
A good Franchise Agreement contains a renewal provision, which gives the Franchisee the right to renew if he followed the rules of Franchisor during the original term of the Franchise Agreement and he may have to pay a small renewal Fee upon renewal of the Franchise Agreement.
Some Franchisors reserve an option to buy the Franchisee’s business upon termination or expiration of the franchise. The purchase price may be determined by a formula or may be the fair market value of the business, without any value attributed to the expired franchise.