Who holds the cards in a franchise sale?

Selling your franchise without the approval of your franchisor? Kids, don’t try this at home. As any experienced franchisee knows, franchisors usually hold all the cards in this kind of deal – at least in the garden-variety franchise agreement. “Normally, a franchisor has the right of approval over who a franchisee sells to and also a right of first refusal to buy it,”…

The Globe and Mail
May 27, 1996

Who holds the cards in a franchise sale?
John Southerst

JohnSoutherstEnterprise.jpg

Many franchisees were scratching their heads when Scott’s Hospitality’s plan to sell its 400 KFC franchises to Laidlaw wound up in litigation because the franchisor, Pepsi-Cola Beverages, had not approved the sale.

They also might have been amazed when the chief executive of Laidlaw, which planned to sell the KFC concession to A&W Food Services of Canada, expressed surprise that Pepsi was making a claim.

Selling your franchise without the approval of your franchisor? Kids, don’t try this at home. As any experienced franchisee knows, franchisors usually hold all the cards in this kind of deal – at least in the garden-variety franchise agreement.

“Normally, a franchisor has the right of approval over who a franchisee sells to and also a right of first refusal to buy it,” says Toronto franchise lawyer Ned Levitt.

For instance, a franchisor who doesn’t want to give consent for a sale could choose to buy it or control who gets it.

Mr. Levitt is quick to point out that Scott’s Hospitality, as a powerful master franchisee, may have avoided such a clause in its agreement with Pepsi. But most franchisees need to get their franchisors onside to sell their stores.

At the extreme, to say a franchisee should be able to sell to anyone is clearly ridiculous. “It goes against the nature of franchising,” Mr. Levitt says. “The franchisor has to be able to protect the system and other franchisees from the damage that can be done by a poor, unmotivated or underfinanced franchisee.”

When franchisors vet prospective owners, they look for all the signs of dedication, intelligence and integrity that any franchisee needs. After all, it’s important that the new franchisee be as capable of day-to-day management as the previous owner.

Nevertheless, franchise agreements usually say that a franchisor’s consent for a sale cannot be “unreasonably” withheld. But what’s unreasonable? The trouble lies in that murky legal phrase. The only way to discover what your franchisor thinks is reasonable is to find out what has happened in the past.

For instance, a franchisor that takes back a lot of franchises may pick up stores “cheap” from owners in distress, run them as corporate units and then resell them later at full price.

The way to check out the past is to ask ex-franchisees. Unless you’re in Alberta, where franchisors must provide lists of past franchisees, these names can be difficult to track. Ask existing franchisees whether they know individuals who have left the system. Suppliers may also know some ex-owners.

Amin Amlani, owner of two Japan Camera franchises in Ottawa, recently sold two other stores when his sons chose different careers after graduation. The franchisor offered a range of prices that stores had recently fetched and provided a list of interested buyers but Mr. Amlani set the final price. He ultimately sold the stores to former employees that he approached himself.

Getting Japan Camera’s co-operation wasn’t a problem for Mr. Amlani because he was not personally running all four stores. “If you sell to an owner-operator, you get better performance,” he says. “Japan Camera was open-minded enough to realize selling the stores could only benefit the company.”

And sure enough, revenues at both stores are up more than 20 per cent since the arrival of their new owners.

So if Scott’s could just convince Pepsi that A&W would be an improvement as the franchisee, perhaps a court case wouldn’t be necessary.

Or perhaps it wouldn’t make a difference. Street talk says Pepsi wants to scotch the sale to set the stage for a more favourable franchise agreement with A&W.

Whether that’s true or not, not all franchisors are friendly bystanders to sales of their units. And, to be fair, not all franchisees understand the legitimate reasons for why franchisors intervene.

Here are some common roadblocks to watch for:

  • Some franchise agreements say the franchisee must have “never been in breach” of the agreement. A minor contractual point could therefore be used to block a sale. Mr. Levitt says that when he reviews an agreement prior to signing, “I want to see that the franchisor can’t withhold consent unreasonably.”
  • The transfer fee charged by the franchisor should not be excessive or open ended. “The franchisor has expenses related to the sale,” says Mr. Levitt, “such as due diligence, training and general hand-holding.” But the fee shouldn’t make transferring franchises a profit center.
  • Many franchise agreements don’t allow the franchisee to advertise the sale. “That can really hamstring a franchisee,” Mr. Levitt says. “It had better be a franchisor with a big aftermarket and a network of potential new franchisees.”
  • Agreements may also give franchisors the power to veto a sale that sets too high a price. This isn’t necessarily ominous. A high price may be a problem because the new franchisee’s expectations will be too high, Mr. Levitt says. “It’s inviting disappointment.”

Some franchisors will try to frustrate a sale by refusing to accept any purchaser. In that case, Mr. Levitt says, “you have to ask yourself whether the franchisor is a competitor in the sale.”

John Southerst is a Toronto business writer who can be reached by E-mail at moc.eriw-eht|htuosj#moc.eriw-eht|htuosj.


Brought to you by WikidFranchise.org

Risks: Refusing franchisee resale, Franchisor’s right to buy outlet before anyone else does, Franchisor takes franchisee store, resells to new dealer, Canada, 19960527 Who holds

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License