If your circumstances have changed since you bought your franchise and you want to transfer it, you’ll have to follow the rules laid out in your franchise agreement. Sometimes, that’s not so easy.
What Does It Mean to Assign or Transfer Your Franchise?
When you bought your franchise, you entered into a franchise agreement giving you, the franchisee, access to products, services, or systems developed by the franchise owner (called the franchisor) along with certain rights like the use of the franchisor's name.
Your franchise agreement is a contract between you and the franchisor and, like any contract, you can’t simply decide you no longer want to follow it or that you want someone else to take it over. If you want out of your agreement before it expires, you’ll need to do what’s called assigning or transferring the franchise—a process that gives someone else your rights and responsibilities under the franchise agreement.
Is Selling a Franchise the Same as Transferring It?
There are situations where you might want to transfer your franchise without selling it, such as if you decided to retire and pass on the business to a family member. And there are situations where you might want to sell your franchise because, for instance, you’ve made a lot of money from it, and you can get a good sale price to fund another venture. But either way you’ll have to transfer the franchise agreement to the person taking over your business before you can walk away.
If you originally bought your business from an independent owner who started and built it, you would have the right to put it out on the open market and sell it to whomever you chose without any obligations to the person you bought it from. But when you bought your franchise, you entered into a franchise agreement that covers practically every aspect of your relationship with the franchisor including if and how you can assign or transfer the franchise. It might require the franchisor approve the buyer, and it might give the franchisor approval rights over the sale or transfer price.
Other than the franchise agreement itself, many states have laws that govern if, when, and how any contract can be assigned. So, before you try to transfer your franchise be certain to read your contract carefully and check the laws in your area, or get some help from an experienced business law attorney.
How to Transfer a Franchise
If the term of your franchise agreement is about to expire and you don't want to sell your business, you can simply let the agreement expire and not renew it. But if you want to get out of your franchise agreement before it expires, you’ll need to follow the rules set forth in your franchise agreement.
A few franchise agreements don’t allow you to assign or transfer but most do, provided you meet certain conditions. The conditions can vary depending on the type of franchise and the franchisor but usually require:
Notice of your intent to transfer. Before you enter into any contract to transfer your franchise, you will usually have to give the franchisor written notice of your intention. It's usually a good idea to do this early and before you go too far down the road in any discussions about a transfer like showing a third party your books.
A written agreement. The person to whom you are transferring your franchise must agree in writing to take over all obligations and responsibilities under the franchise agreement such as the obligation to pay royalties to the franchisor and protect the franchisor's trade secrets.
Written approval from the franchisor. Franchisors must agree to the transfer in writing, and they can refuse to allow assignment under certain conditions. They might require proof that the person you are transferring the franchise to has the business experience, credit standing, health, and financial resources to successfully operate the franchise. They can require the buyer to complete training courses, and they might require you to pay any debts you owe to the franchisor before you transfer your contract.
A guarantee of sorts. In most cases you must agree to remain liable under the franchise agreement so that if the person to whom you are transferring the franchise breaks any of the rules of the agreement such as not paying royalties, you can be held responsible. You can even be sued by the franchisor for unpaid royalties.
Payment of a transfer fee. Franchisors typically charge a fee for transferring a franchise.
Although it's unlikely, it's possible that your franchise agreement specifically states that you can't assign it. Typically, these clauses are not favored by the courts because in most states a franchise is treated as a piece of property, and the law usually gives individuals the right to dispose of property in any way they like.
Is the Process Different If You Sell Your Franchise?
Typically, if you want to sell your franchise business, many of the same terms and conditions will apply. But there are often additional provisions including:
- written notice that includes the buyer’s name and purchase price, and
- an offer to the franchisor to buy the business at the same price offered to the buyer (called a right of first refusal.)
These requirements might also have time limits, such as the amount of time the franchisor has to exercise an option to buy and the amount of time you have to close a deal. If the franchisor doesn't exercise the option to buy the franchise, you can sell to the buyer. But if a deal doesn't close in the required time frame, you must again give the franchisor written notice and right of first refusal.
Is the Lease Included in the Transfer?
If you have been leasing property to operate your business, you probably have a lease agreement with someone other than the franchisor, and your lease agreement is separate from your franchise agreement. Transferring it will require a separate transaction.
Check your lease agreement to understand your rights and responsibilities, and whether and how you can assign your lease.