Business / Commercial

Tips for Franchisors Selling Franchises

Selling franchises is not easy.  First you have to find the right franchisee, and when you do you need to make sure that all the right legal boxes are ticked to help ensure that there are no issues in the future.  Here are some tips to help you:

Ensure that they know exactly when payments are required to be made.  If you are a member of the Franchise Association of New Zealand Inc. and you require the franchisee to make a payment prior to the Franchise Agreement being signed then you must make the franchisee aware of (in writing) the purpose of the payment, the terms and conditions governing refund or application of the money and who will be holding the payment.

  • Confidentiality – we strongly recommend you make sure that any prospective franchisee signs a confidentiality agreement before you provide them with any information.  This puts them on notice that the information they are about to receive is not only your intellectual property but it is confidential.  It also demonstrates to them how serious you take your business and will take their business.

  • Process – ensure that everyone involved in a sale knows what the process is.  For instance: What is the application process?  When will they be deemed to be approved as a franchisee?  What further conditions will they need to meet?  When, where and for how long will training be conducted and what are the training costs?  What is the total time frame for this?

  • What will they be getting? - too often assumptions are made about exactly what a franchisee will be getting when they purchase a new franchise.  This information should be clearly spelled out.  For example:
    • What initial equipment will you be providing them and what will they have to purchase themselves?
    • What is the extent of the training they will receive?
    • What initial support will the franchisee be provided with (e.g. promotional support and material and support with business commencement)?
  • The financial details – ensure that your prospective franchisee is provided with clear information about what the total outlay will be.  For instance:

    • Working capital requirements?
    • Cost of the initial equipment, initial stock, vehicle purchase and signwriting, uniforms and software etc.?
    • If they are required to pay your legal costs – what are these estimated to be?
    • What are the training costs?
    • What amount is required for fit out, rental deposit and bank guarantee?
  • Projections – we recommend not providing any projections.  These can be fraught with issues.  If you do you will need to be able to prove that these were based on factual information.  Otherwise you run the risk of being in breach of the unsubstantiated representation provisions of the Fair Trading Act 1986.  You will also need a disclaimer.  However, a disclaimer will not alleviate you of responsibility if the information in the projection was not based on facts or is misleading in anyway.

  • The documents – make sure your franchisee is aware of exactly what documents they will be required to sign – e.g. franchise/ licence agreement, sublease/ licence to occupy, general security agreement.  Make sure the franchisee has an opportunity to review your manuals (once they have signed the confidentiality agreement of course).

  • Premises requirements – if the franchisee will be leasing premises as part of the franchise business then all parties should be aware of:

    • Who will be responsible for fitting out the premises? What are the costs involved?
    • What happens if the fit out runs over budget? What happens if there are delays?
    • What are the terms of the lease? Will you be subleasing or licensing the premises to the franchisee or will the franchisee be required to enter into the head lease?
  • Marketing and Promotion – a franchisee may require some certainty about the level of marketing and promotion that will be undertaken by you.  We recommend providing this information to the franchisee without a request being made or at the very least having this information available on request.

  • Franchisees - have a list of current franchisees who they can contact to get a good understanding of what it is actually like to be one of your franchisees.

Advice - insist on your franchisee getting independent legal advice.  This is for your benefit and theirs.  It is vital that they completely understand what they are getting themselves into.

For more information contact:

Lizandra Bailey

 

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