Starting a small business by buying into a franchise (or a "distributorship," which is essentially the same thing) is very popular. Instead of starting your business from scratch, you get goods, services, and a business name that the general public already recognizes and buys. But, for a variety of reasons, sometimes an entrepreneur wants out of the franchise business.
If the term of your franchise agreement is about to expire, then you really don't have a problem: just let it expire, don't exercise an option to renew, and your relationship with the franchisor will come to an end. But, what if you want out of the agreement early? Basically, your only option is to assign or transfer your franchise to someone else. And, sometimes, that's not so easy.
In a nutshell, when you buy a franchise, you pay a franchise fee to the owner (called the "franchisor") of some product, service, or way of doing something. In exchange, you (the "franchisee") get access to the product, service or system, the right to use the franchisor's name, and usually some help from the franchisor, like training materials.
Practically every aspect of your relationship with the franchisor is covered by the franchise agreement signed by you and the franchisor, including if and how you can assign or transfer the franchise.
What's an assignment? It's when someone else (the assignee) takes over your rights and responsibilities under the franchise agreement. Essentially, the assignee steps into your shoes as to the agreement. You can still run a business, but not that franchise. For example, say you bought a restaurant franchise. If you assign the agreement, you can still operate a restaurant, but not that franchise.
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 make an assignment, be certain to read your contract carefully and check the laws in your area, or get some help from an experienced business law attorney.
Assigning or Transferring the 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, in general, supports an individual's right to dispose of his or property in any way he or she likes.
More often than not, your franchise agreement will allow you to assign the franchise if and when certain conditions are met. These conditions, of course, are generally for the benefit of the franchisor, and they can vary significantly depending on the type of franchise and the individual franchisor. In general, however, such conditions typically include things like:
- The assignment has to be in writing, and it must include a provision in which the assignee agrees to assume, or take over, all of your obligations and responsibilities in the franchise agreement, such as the obligation to pay royalties to the franchisor and protect the franchisor's trade secrets
- Either in the assignment document or by some other written agreement, the franchisee must agree to remain liable under the franchise agreement. If you assign the franchise and your assignee violates or "breaches" that agreement by not paying royalties, for instance, the franchisor can hold you responsible and even sue you to recover the unpaid royalties
- Before any assignment takes place, you have to give the franchisor written notice of the proposed assignment, the name and address of the assignor, and how much you're being paid for the assignment, if anything
- The assignment can't be made without the franchisor's written consent
- The franchisor can refuse to consent to the assignment unless certain conditions are met, such as: (1) proof that the assignor has the business experience and capability, credit standing, health, and financial resources necessary to successfully operate the franchise; (2) the assignor has completed the franchisor's training courses, and; (3) you're not in breach of the franchise agreement, and you agree to pay all sums you currently owe to the franchisor before the assignment takes place
Typically, if you want to sell your franchise business, many of the same terms and conditions will apply. But, there's often an additional provision that:
- Requires you to give written notice of the proposed sale that includes information like the name of the buyer, the purchase price, and,
- Gives the franchisor a first right and option to buy your business within a certain amount of time, usually 10 to 20 days, and at the same price offered to the buyer
- If the franchisor doesn't exercise the option, you can sell to the buyer
- If the sale isn't completed within a certain amount of time, such as within 90 or 120 days of the offer, then you have to once again give the franchisor notice of the proposed sale and the first opportunity to buy the business before you sell it to the buyer
Questions for Your Attorney
- If I assign my franchise and the assignee breaches the franchise agreement, can I sue the assignee to recover anything I have to pay to the franchisor?
- Is it better for me to sell my franchised business or to assign the franchise agreement?
- I want to assign my franchise, but my franchisor won't approve the deal, even though my assignee is well-qualified. What can I do?