Can a Franchisor Stop You From Selling Your Franchise?

A franchisor may delay or prevent the sale of your franchise. It may not be necessary to consider a refusal as a hard “no.” In some states, there are provisions that may help you to sell your business, particularly if you have encountered multiple refusals. Our short video “Can a Franchise Order Stop You From Selling Your Franchise?” provides answers to this question many franchisees ask. 

In most cases in which a franchisor stops you from selling your franchise, you should refer to the franchise agreement. To gain a correct understanding of its content, you would be well-advised to retain our franchise lawyers in Orlando, FL. At Luther Lanard, PC, our team will know how to interpret franchise agreements and can handle disputes regarding the buying and selling of franchises. 

Reasons a Franchisor May Stop You From Selling Your Franchise

Most franchise agreements have specific clauses governing the sale of a franchise. They typically stipulate that you can only sell a franchise to a buyer that they approve. If you try to push a sale through without the franchisor’s approval, they may block the sale. Reasons they may order you not to sell your franchise include:

Buyer Qualifications

Just as you had to fulfil certain qualifying criteria to become a franchisee, your buyer must also meet the franchisor’s requirements. Franchisors must defend their standards so that franchises offer a uniform level of quality and service to customers. If the franchisor has reasons to believe that your prospective buyer cannot do so, they will stop you from selling to that particular buyer. 

To decide whether they are willing to accept your buyer, the franchisor will consider the buyer’s financial status and whether they believe they have the necessary operational experience and managerial skills to fulfil their requirements. If they are not satisfied, they may issue a franchise order that can stop you from selling your franchise. 

Ensuring a Fair Chance of Profitability For the New Owner

A related reason why a franchisor may not approve a sale is that it does not want your franchise store to fail. For example, if there are concerns that your asking price is so high that a new owner would struggle to maintain profitability, a franchisor may object to the sale. Quite simply, it does not look good if a franchise suddenly closes down–and the franchisor will lose revenue if it does. 

Non-Compliance 

If you have not upheld the terms of the franchise agreement, or your compliance is under dispute, the franchisor may reserve the right to prevent any sale of the franchise until you have demonstrated compliance. This may include issues like: 

• Compliance with royalty payments
• Maintenance of franchise standards
• Remodel requirements 

Apart from breaches giving the new owner a bad start, non-compliance with contractual terms implies that you owe a debt to the franchisor, even when that liability is not financial in nature. At Luther Lanard, PC, our experienced franchise attorneys in our Orlando, FL office, can provide you with helpful advice if alleged non-compliance with the terms of your franchise agreement is blocking your ability to sell. 

Right of First Refusal

Some franchise agreements allow the franchisor the right to purchase your business if they can match a formal offer you have received. Although this may sound simple enough, the first right of refusal may prove contentious, depending on the terms of the proposed offer. 

For example, if your franchise is to be sold for a certain value and the sale of additional assets is added to the agreement for additional value, your franchisor can argue that it has the first right of refusal on its franchise alone, and is not obligated to match the full value of the formal offer. 

Upholding Brand Reputation

Your franchisor may not be satisfied that your prospective buyer will align with its brand. This opinion could relate to your buyer’s business or personal reputation. In addition, if the franchisor has reason to believe that the buyer does not have the necessary experience to manage the franchise in accordance with its standards, it may also block the sale. 

Steps to Take When Seeking To Sell Your Franchise

It may be possible to sell your franchise without the franchisor raising any objections. Follow the process carefully and get advice from our franchise attorneys in Orlando, FL. Our lawyers know how to exit a franchise agreement through the sale of the franchise. This can prevent you from facing a franchise order stopping you from selling your franchise because your franchisor is satisfied that your request is reasonable. 

Review the Franchise Agreement

Your franchise agreement should clearly state what terms apply if you wish to transfer your franchise to a third party. It should state whether any fees or restrictions apply and specify how the franchisee approval process works. Since franchise agreements are intricate legal documents that may not seem clear to a person unfamiliar with contract law, it is prudent to hire a franchise lawyer to help you review it in order to preempt any objections. 

Review the Franchisor’s Approval Criteria and Navigate the Franchise Transfer Process

Requirements for transfer of ownership are standard features of franchise agreements. Just as you had to meet certain requirements to get approved as a franchisee, your buyer must also be able to match these criteria. A typical process is as follows:

• Submit a transfer request to the franchisor.  Provide all the details that will allow your franchisor to evaluate your prospective buyer as a potential franchisee. Show how this buyer meets the franchisor’s requirements. 
• Allow the franchisor time to evaluate the prospective buyer and give you feedback. The franchisor will consider questions like whether your buyer is financially stable and look into their business background. They will also perform background checks, including checking to see if there is a criminal record.
• Follow up to see if your buyer is complying with the franchisor’s requests. Your franchisor may ask your prospective buyer for additional information and may wish to interview them. 

Once your franchisor has the information it needs, it will approve or deny the sale of your franchise. If it decides to deny it, the franchisor may just want more information from the prospective buyer. Alternatively, your franchisor may have decided that your buyer is not a desirable franchisee. Either way, they must tell you why the potential transfer is being declined. You may be able to avoid these pitfalls by getting guidance that facilitates the selling process.

Is Your Ability To Transfer Protected By State Law?

Most states uphold the terms set out in franchisor contracts. Nevertheless, if there is evidence that your franchisor is unreasonably preventing the sale of your business, you may be able to argue that the franchisor does not have reasonable cause to block the sale. 

For example, Chapter 686, Section 413 of Florida’s statutes specifically states that consent for a transfer of franchise ownership may not be unreasonably withheld. For this to apply, it will be necessary to show that your buyer would generally be considered a qualified franchisee and that your franchisor is unreasonably preventing the transfer of ownership. 

This would naturally mean that you have provided all the necessary information about the prospective buyer and have shown your franchisor that the buyer meets the usual requirements imposed on franchisees. Where the franchisor has nevertheless rejected your request without furnishing valid reasons for rejecting the buyer as a franchisee, you may have a claim . 

Costs and Outstanding Liabilities The Franchisor May Use to Stop You From Selling

Once again, consult the initial contract to find out what your franchisor expects you to do if you sell your franchise. When transferring a franchise, there may be transfer fees to cover legal and administrative costs. Your franchisor may also require you to pay training and onboarding costs. If these fees are the cause of a dispute with your franchisor, Luther Lanard, PC may be able to negotiate a mutually acceptable outcome on your behalf. 

As previously noted, any fees or costs you have not covered as a franchisee may be payable before you can effect a transfer of ownership. Additionally, if you have defaulted on your agreement in any way, you may have to correct such shortcomings before you can sell your franchise. 

What if You Are Struggling to Find a Qualified Buyer?

If your franchise is not performing well, has become a burden, or your asking price is too high for most buyers to consider, you may struggle to find a qualified buyer. A franchise order that stops you from selling your franchise may leave you in a difficult position. In these circumstances, there are several alternative courses of action you can attempt. 

Search for Buyers at a Lower Price Point

You may be able to attract other buyers if you reduce the purchase price of your franchise. While this could mean that you do not recover your full investment, it may free you from a situation in which liabilities to your franchisor and landlord continue to accrue. You will recover part of your capital and be able to walk away from a situation you find untenable or undesirable. 

Request a Change of Location

If you are considering selling because your franchise is doing poorly, it may be because the location fails to attract enough customers. In general, franchises are proven business models that improve the chances of a new business succeeding. 

Your franchisor may be willing to consider allowing you to move to another location. You would have to negotiate this with your franchisor since your agreement specifies a “territory” that you serve. This may help you to sell your franchise in the long run. Meanwhile, a better location may improve your business’s performance.  

Request Additional Training and Marketing Support

Your franchise may be struggling because you need more support from your franchisor. They may be open to helping you with additional training or be willing to market your location more aggressively to help you keep your doors open. 

While this means you cannot sell your franchise right away, improving its value by finding ways to boost its bottom line may make it more attractive to prospective buyers later on. This may improve your chances of finding a buyer your franchisor is willing to approve as well as selling your franchise for a greater price. 

Negotiate an Exit Fee

Your prospective buyer may be willing to buy your business without the franchise. However, this may prove very costly for you. For example, since your buyer will no longer have access to the franchisor’s brand equity, they may expect you to sell for far less. 

There will be other losses in store. Franchisors may calculate exit fees that include the loss of future profits from your franchise. This means that they may be able to claim payment of fees and royalties for the full term of your contract. Non-compete clauses, identified by the Federal Trade Commission as the sixth most frequent franchisee concern, may also complicate your exit from a franchise. 

By exiting a franchise before your contract term ends, you are in breach of contract. Liquidated damages are therefore payable. Luther Lanard, PC’s experienced franchise attorneys can help determine whether the liquidated damages clause in your contract can be enforced and potentially negotiate a reduction of other exit fees with your franchisor.

Consult Our Experienced Franchise Lawyers in Orlando, FL

If you are having difficulty exiting a franchise by selling your franchised business or are considering abandoning a franchise agreement, you need Luther Lanard, PC on your side. Our franchise lawyers can help you in several ways. These include: 

• Reviewing your franchise agreement and the enforceability of its clauses 
• Determining why you have received a franchise order stopping you from selling your business
• Pushing back when your right to sell is unreasonably denied or there are unnecessary delays
• Evaluating franchisor demands regarding conditions they wish to enforce before you can sell
• Negotiating claims for liquidated damages and other exit fees
• Drafting agreements to facilitate the sale of your franchise
• Ensuring that there will be no unreasonable post-sale liabilities, an issue the American Bar Association highlights in its guidance to franchise attorneys 

It is possible to sell franchised businesses profitably, but there are many complexities that require careful planning and orchestration to ensure a smooth sale. By enlisting the help of our experienced franchise lawyers in Orlando, FL, you stand a better chance of presenting a proposal your franchisor will gladly accept while maximizing your returns on the deal. Indeed, many entrepreneurs engage with franchises, build value, and sell their businesses for a substantial profit. 

If you would like to assess your likelihood of achieving a successful sale of your franchise while satisfying franchisor requirements, contact Luther Lanard, PC, for a confidential consultation. Our experience will help you navigate the sale process more easily, and we will work to overcome objections your franchisor may raise.